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Bain Capital, with $160 billion in assets, is one of the largest private, private equity firms. Despite many of its peers going public, like TPG earlier this year, Bain has no immediate plans to join them. 

John Connaughton is Bain Capital’s global head of Private Equity and co-managing partner. He sat down, exclusively, with CNBC’s Delivering Alpha newsletter to talk about headwinds facing private equity, the current dealmaking environment, and why his firm is staying private. 

 (The below has been edited for length and clarity. See above for full video.)

Leslie Picker: It feels like we’re in this kind of inflection in the dealmaking environment right now. What are you seeing out there as you’re having discussions with your various counterparties?

John Connaughton: It was an amazing year last year, ’21 is unprecedented in many ways. We had a record, which is not unusual in our industry, but it was a record that exceeded any prior record by two times. We had a $1.2 trillion M&A market for private equity. But it’s interesting, in the first quarter of this year, it continued unabated, I think the number’s around $330 billion. So, we’re still seeing quite a bit of activity, despite, obviously, the dislocation in the public markets.

Picker: Are you seeing multiples come down, though, as a result of things like rising interest rates, the cost of debt, the cost of equity becoming increasingly expensive? How are those conversations shaping up?

Connaughton: Always, in these cases, the public markets, they re-rate immediately and we’re seeing that, and we continue to see that as an opportunity. Although, every cycle I’ve been involved with, sellers will take some time before they’re willing to transact at those lower multiples. And so, it does need to season into lower value. So even the tech sector – which we’ve done a number of transactions this year in tech at much lower multiples – it does take time, because the flow for a while will take some time to get the quality assets to reset to lower values.

Picker: Based on your experience, how much time does that usually take? Are we talking? Few months, six months, a year, several years at lower valuations?

Connaughton: If the volatility continues, people will want to wait to see if the uptick will continue and persist. But I think this one, I think will be different. Because in this case, I think we’re going to see rising rates, we’re going to see inflation. And so, the re-rating feels like it’s more permanent in its impact this time. And so, I do think it’ll take six months to 12 months in the public markets and the private markets probably will follow six months later.

Picker: I want to turn to private equity returns because in some cases, in many cases, they’ve usurped other asset classes in recent years, and so therefore, they’ve become a higher concentration of various limited partner portfolios. As a result, are you seeing instances of LPs kind of pulling back, needing to scale back their exposure to private equity and what has that meant for fundraising for the industry?

Connaughton: We continue to see the fundraising support for our platform to be quite attractive. I do think that what happened in the last two or three years is that people were investing at a much more quick pace relative to their investment fund size. And so, people were investing funds in one or two years. And that’s really not healthy for our investors, their management of their own endowments, and foundations and pension funds. So, I think this notion of going back to fund cycles that are three to four years will be likely what comes about relative to the pace of investing activity going forward. Which means, I think, for the limited partners, that I don’t think you’re going to see the private equity industry coming back every year, every two years. And that’ll help them manage their ultimate unfunded commitments, which is what they’re really worried about.

Picker: So, do you think too that the industry has gotten too big? Is it something that may be more of a natural progression in the industry in terms of just these massive buyout funds, record buyout funds, that we’ve seen, just the overall size of AUM, the number of funds that are out there, is that something that eventually does need to kind of shrink?

Connaughton: It won’t surprise you that I do believe that the industry will grow, and I think,  grow significantly from here still. I do think we’re not going to see a $1.2 trillion year every year. I do think we came into ’21, with about a $500 billion to $600 billion pace of activity for the industry – and by the way, that’s much higher than it was 10 years before that. And that’s because of global expansion. I think that’s because of the size of equity check for larger enterprises, I think, which weren’t touched 20 years ago, I think, have become more accessible for private equity. I do think we’re much, much more likely to be involved in transactions that would go public sooner in prior cycles and now we’re actually able to take advantage of those firms that would want to go public. And so, I do think this expansion of private equity is penetration into the public equity markets, writ large across the globe, still has a long way to go. 

Picker: You brought up a good point, which is the idea of companies going public. And so, I want to flip the tables and ask you about your own portfolio and just the opportunity to have exits. IPOs have had a pretty good run, even just over the last decade or so with some windows opening and closing. But overall, a pretty good run. Not the case in 2022 and some of the benefits that you’re getting on the buy side may not be so attractive on the sell side as you look to exit certain investments through sales. So, how do you think of that equation? Are you kind of in that hunker down mode as well or are you being opportunistic in the current environment?

Connaughton: One thing I think people misjudge about our industry is that they think it is short term and oriented towards a particular capital market cycle or credit cycle. I do think one of the virtues of our industry is we do think long term about exit optionality, and we know that cycles will come and go. We have a business that we still own, Bombardier Recreational Products, which we’ve owned for 20 years because we see the inflection still remains to see equity go up in that company over that entire period. So, for us, when we think about exits, we never think about can we exit next year or two years, we think about a window of three to five years where we may have the opportunity, we may not. And certainly, if we have to hold on to a business, we have very much an underwriting that looks to the idea of can we generate returns if we have to hold it for a very long time. And if we do that, I think it doesn’t matter when the markets come and go.

Picker: You are, from what I understand, among the largest private, private equity firms. Many of your peers have gone public. Why remain private? Have you considered an IPO? And what’s holding you back from doing one

Connaughton: A lot of people ask us that question, given our scale, and certainly our scope. We have 12 businesses, and we’re in every geography. But I sort of start with the fundamental question of does it provide our firm a competitive advantage, or more importantly, is it a competitive disadvantage to not being public? And as we’ve examined that, we’ve been able to start as many businesses as we wanted to, we have a big balance sheet, we’ve doubled our AUM in the last four or five years. We think the town advantage for being private is really valuable because we don’t give away our economics to public shareholders. It’s fully retained inside the firm. And so far, and again, things could change. I mean, Goldman was private for a long time before it went public and that was after a lot of their peers went public. I do think it could change, but I think right now, we think it’s a competitive advantage to be a large-scale, private equity firm that has a very broad set of asset classes that it manages and do it in a way through our own resources and our own capital. So, we’ll see, but at this moment, we’re not going public.