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Jingle

Welcome to the EY Next Wave Private Equity podcast, where industry leaders come together to discuss emerging opportunities and industry trends shaping the global private equity landscape.

David Humphrey

You saw some truly extraordinary valuations of technology businesses that were very hard to justify.

Bridget Walsh

That's David Humphrey, Co-Head of Bain Capital’s North American Private Equity business. I'm Bridget Walsh, EY's Global Head of Private Equity. In this episode, David will be sharing his view on investing in the tech space. David, thank you very much for joining the podcast. Great to have you with us.

Humphrey

Thank you so much for having me. Bridget. It's a pleasure to be with you today.

Walsh

David, Bain Capital is one of the world's leading private equity funds, with over $175 billion under management. Perhaps we could start with a bit around Bain Capital’s approach and philosophy to investment.

Humphrey

Absolutely. So, Bain Capital was started in 1984 with a set of principles that remain true today. And it's one of the things we're proud of, just the enduring nature of the strategy and approach that we've employed. Bain Capital was formed with a premise that if we're good at advising and supporting businesses and identifying great businesses, that we should invest behind those businesses, and if they do well, we'll do well and in particular gravitate towards businesses that solve a really important problem for their customers that do so in a competitively advantaged way that will withstand the test of time, and that have some discontinuous opportunity to grow with our help. And that if we got those questions right about the value proposition, the competitive position and the growth opportunity that the financial returns would follow.

Walsh

You've lived through many cycles, David, probably none as challenging as the one we've seen over the last few years. It'd be good to get your views on the macroeconomic backdrop, and is it a good time to be an investor in technology today?

Humphrey

I do think it's a good time to be invested in technology today, and I think that's been the case for most of the last 22 years. So, I was fortunate to pick technology when I joined Bain Capital in 2001, it's been a lot of growth from there to now, investing in the likes of Athena and many others. But we've seen through that period of time just the persistent growth of technology. We all feel it in our daily lives, just the amount of innovation that continues to occur. It's easy to forget that even the smartphone in its current form is barely more than 15 years old. And the cloud, in a sense of scale, really is within the last ten years that the likes of AWS and others have become very large. And of course, we're seeing in real time AI advances and the likes of ChatGPT and others. I think it's therefore a very exciting time to invest in the technology sector, because there's so much innovation happening and at real scale, such that it's really shaping our economy in very profound ways. We try to focus on the places where we have the most advantage, and that's why we look for places where we have unique insights within our team around the world, or unique advantages we can bring across our platform, or for companies that we can really partner with and help. We look at this and we actually think it's an interesting time to invest in technology because the secular growth is real. We're seeing a lot of innovation, a lot of growth, but we're seeing businesses now valued in a way that makes fundamental sense again. In late 2020 and to mid-2022, when technology continued to grow through the pandemic, but interest rates were cut to near zero. You saw some truly extraordinary valuations of technology businesses that were very hard to justify unless you presumed a near zero interest rate environment for a very long time. 

So, we leaned back, honestly, from that environment. But now we see a repricing of that growth and that risk in a way that makes much more sense. And so, we're excited about all of the innovation and growth in tech and values that, while still full, because these are great businesses, are reasonable and can be supported on a fundamental basis.

Walsh

David, you mentioned Gen AI as you were talking about the opportunities, at EY we're seeing a huge amount of activity around Gen AI, both how we deploy it in our own business, but also from our private equity clients. How real do you see it? How are you applying Gen AI as you look at investments today?

Humphrey

So, I think this is a really important and powerful question and innovation that has been brought to the technology markets. It's worth noting that while it feels so discontinuous and like there was this moment in time associated with the release of some of these Gen AI technologies. The AI journey is not new and is something that has been progressing over really the last set of decades and accelerating over the last ten years. But, that said, I think generative AI has certainly opened up the eyes of the world to the possibilities and potential for AI more broadly, and certainly this application of it. We've thought about three broad topics to consider. The first is what are the implications of generative AI for new investments. So, what are the types of sectors that we should be leaning into, because they will really benefit from the potential and possibility of generative AI. For instance, businesses that own some truly unique and valuable set of data that could be applied to a really important problem now have the ability to make use of that data in a way that's more profound than they did before the application of generative AI was possible. Or businesses that have true leadership and ownership within a given sector or a given market. Businesses that are entirely reliant on services and on manual tasks, how can they utilise generative AI to their benefit and to their customers' benefit relative to how is the productivity gain going to be affecting the competition for those industries? That's the first broad question is new investment themes. The second is what are the implications of generative AI for our large portfolio of companies? 

And we see a lot of productivity gains that our portfolio companies can realise as a result of generative AI, certainly in content creation and lots of manual tasks, even coding efficiency and support functions. But we also see new innovations that our portfolio companies can bring and accelerate with generative AI. And then the third question is the implication of this for our own business. We look at some of the efforts we undertake, some of the processes that we've done more manually for a long time that we can now speed up or augment with the use of AI. So, we’re actually, we've got a big team studying all of these implications, working across our sectors, working across our business units and we think this is a place where Bain Capital can bring the kind of scale and thought leadership to a really important problem, to the benefit of our portfolio companies, our own business, and hopefully to make really informed investment decisions. But there's a lot for all of us to learn about this topic. 

It’s really exciting, really interesting to play around with and to learn from and, like any new technology, there will be lots of unanticipated developments and innovations that will be fascinating to watch.

Walsh

Just delving a little bit more micro for a moment, David, I noted a very interesting deal that you were involved in. You sit on the board of Nutanix, which is a very interesting cloud infrastructure company. Maybe you can share a little bit about that investment and what the particular thesis behind that was.

Humphrey

Absolutely. Nutanix is a public company that we invested in in 2020. It is, as you say, a leader in hybrid cloud infrastructure. It's really remarkable because it's just about a $2 billion business that's only 13 years old. So, pretty remarkable the growth and success that they've had. Our investment into Nutanix arose out of really when the pandemic happened. We looked and there weren't many regular wave private equity transactions happening because the financement markets had frozen and everybody was trying to figure out if you put yourself back in the shoes of 2020, in the spring of 2020, trying to figure out what the future held. And so, we looked for, in the public markets, businesses that we thought were growing were innovative, where leaders in what they did, but needed access to capital for whatever reason. In the case of Nutanix, they really created some important categories of hybrid cloud infrastructure, including a technology called hyperconverged infrastructure, which really used software to solve a compute storage and networking problem in the 2010 timeframe. And they were undergoing a transition from basically selling an appliance for the life of that device to ultimately a subscription software business that they are today. And as they were undergoing that transition, they could use access to more capital to fund the transition from a more upfront business model where charge customers upfront to a more rateable model. And so, we spent many hours building a relationship, talking about the future of Nutanix, getting to know the business. And, ultimately, we invested $750 million as primary capital into a public company. 

We took two seats on the board, and we have supported Nutanix in its growth and development since, and the company has just had a lot of success, has grown in an accelerating fashion over that period of time, has become much more profitable and generating real cash flow while it's growing, but importantly, is bringing more and more innovation to its customers in a very focused way. It continues to be a real leader in its sector, and it's just been a pleasure for us to be a small part of the journey of Nutanix in collaboration with the public shareholders, in collaboration with the board and collaboration with the management team. And we look forward to a lot of great things ahead for that business.

Walsh

David, just as we close, your enthusiasm, your passion, your knowledge of the technology sector just comes through in spades. You also have the wider hat as co-head of Bain Capital's North American Private Equity business. What are you most excited about in that wider role, David?

Humphrey

What I'm most excited about in that role is just the opportunity to work with my partners and with our team across all of the things that we're doing. There's not a day that I come to work that I don't feel like I learned something new from several of our partners and colleagues, and that we're not seeing just a set of people that are working just tirelessly and relentlessly to find new insights and new opportunities and ways that we can apply this model that's endured for almost 40 years towards investment opportunities for our limited partners. And it's just been the blessing and joy of my career to get to work with this group of people and the set of partners. Technology has been a fascinating place and a lot of growth and innovation, but we found exciting things to do in the industrial sector, in healthcare and the consumer sector and business services. And the reason is that we just have this core value of partnership and of all working together to find just the best opportunities. And so, I love just the prospect of learning new things and seeing my partners and colleagues in action and just pushing each other to find the best investment opportunities for our limited partners and each other. And so, I'm very optimistic and enthusiastic about what we'll see ahead. Actually, I would say in our pipeline right now, we're seeing a lot of exciting opportunities that we had the discipline, as we were talking about earlier, not to invest our fund fully in the heady times of 2021 and 22. And so we're seeing the benefits now of a lot of interesting investment opportunities, places where either sellers or corporations are looking for real partners to help grow businesses across a wide number of sectors, and very excited about that.

Walsh

Well, thank you very much, David. It's been fantastic to have you on the podcast today.

Humphrey

Thank you very much for having me, Bridget, a real pleasure and happy to do it.

Walsh

That's it for this podcast. But please do subscribe for more insights from the industry's top professionals. From me, Bridget Walsh, and David Humphrey. Thanks for listening. Goodbye.

Jingle

Thanks for joining the EY Next Wave Private Equity podcast. For more insights and perspectives, visit EY.com/privateequity.

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