A Conversation with Luca Bassi and Jeffrey Paduch, Managing Directors, Bain Capital Private Equity and Advent International

Navigator Edition: January / February 2017

We recently spoke with Jeffrey Paduch, Managing Director at Advent International and Luca Bassi, Managing Director at Bain Capital Private Equity. In this Q&A format we discuss their strategy for successful investments in the payments industry, the development of this marketplace, and the evolution of M&A opportunities.

Together, Advent and Bain Capital are the largest private equity owners of independent payments assets in Europe. Since 2007, they have invested in companies that together have managed a portfolio of over 2 million merchants and served over 3,500 banks, covering 100 million cards, 2 million POS devices, over 150,000 ATMs, and processing volumes of over €1.5 trillion. They have completed investments across four continents (North America, Europe, South America, Asia-Pacific) and all sub sectors (ACH, merchant acquiring, issuer processing, e-commerce, alternative payments, FX, money transfer, enabling software, ATM networks, fuel cards and POS terminal manufacture, among others). These investments include: ICBPI/CartaSi and ISP Processing/Setefi, Nets (OMX: NETS), WorldPay (LSE: WPG), Vantiv (NYSE: VNTV), FleetCor (NYSE: FLT), Oberthur and its pending add-on Morpho , Monext (now part of Crédit Mutuel Arkéa), Paysys (now part of First Data), CSU Cardsystem, Euronet (Nasdaq: EEFT), and Argencard, among others. They recently signed an agreement to acquire Concardis in Germany.

Luca Bassi joined Bain Capital Private Equity in 2003. He is co-head of the firm’s financial and business services team in Europe and leads coverage of Southern Europe. Prior to joining Bain Capital Private Equity, Luca worked for Goldman Sachs in the Investment Banking Division in London where he advised Italian and international companies on cross-border M&A transactions. Previously, he worked as a strategy consultant at Bain & Company in Milan where he focused on the industrial, consumer goods, and financial services sectors.

Jeffrey Paduch joined Advent in 2002, moving to the London office in 2005. He is responsible for coordinating the firm’s efforts in the business and financial services sector as well as coverage of the Nordic region. Prior to Advent, Jeff worked in the Financial Sponsors/Leveraged Finance Group of UBS Warburg in New York.

1. Advent and Bain Capital Private Equity have been tremendously successful with investments in the payments industry. What are the key ingredients to this success?

There are two key features in our approach that have enabled us to buy several assets and become a relevant player in the space.

First, we take a partnership approach in dealing with stakeholders, especially owners like banks that are transitioning to customers but also regulators. All the payment assets we have bought had a high degree of seller reliance on the asset post-acquisition. Capability to deliver and make the asset successful and reputation have been key drivers of the sellers’ decisions. We are keenly aware that if we don’t handle the ownership transition well, or deliver on what we say we will do, or improve service for end-users over time, it will become more difficult to have access to more assets in the future.

Second, we are willing to accelerate investment (both organic and inorganic) in the businesses we acquire, often two or threefold the amount of investment that the business has historically enjoyed. A good example is Worldpay, where we spent €1 billion of capital that otherwise could have been distributed to shareholders on organic technology platforms and inorganic capabilities. This was more than the previous 10 years combined under bank ownership. In the end, we believe this created more sustainable growth for the business, which was reflected in the value investors were willing to pay to own shares in the public company after this transformation period.

Now that we have owned several assets, there is a corresponding third factor – which is that we are now considered to be a quasi-industrial player in the marketplace. We can combine the strategic insight of an industrial buyer with the speed and flexibility of a financial buyer, and this differentiates us.

2. And more specifically are there two or three key success factors for both spotting good value and for driving value creation for shareholders post acquisition?

The key driver in delivering a good return for our investors is successfully supporting leadership teams to execute well post-close.

As private equity investors, we are well suited to driving value creation through focused governance, strategic assistance, and incentive alignment.

We often find investment targets in payments, especially in Europe, deep within divisions of banks or owned by bank consortia for historical reasons. Changing governance to focus on the standalone business itself sounds easy on paper but is often complicated in practice. It involves changing the structures that support decisions on everything from capital expenditure to M&A and from talent management to risk, often underpinned by significant cultural change.

In addition, over the last six years, collectively, we have acquired four platform companies in the payments sector and completed more than 15 add-on acquisitions, and this gives us a unique perspective we can use to support management teams. There are many lessons learned from our portfolio, and this experience helps us to drive change, to make informed strategic decisions, and to move faster. In a competitive industry like payments, sometimes being six months faster than a competitor can make a big difference.

Finally, a key aspect of our model in private equity is to grant ownership to management and employees. This helps to align managers and employees with the industrial plan we all have agreed for a business and enables people to invest in themselves and their own performance. It creates stronger alignment, a spirit of partnership, and teamwork around the table, which is a prerequisite for any business transformation.

3. How do you balance the two somewhat different value storylines within payments: 1) a stable utility with great cash flow and 2) an area for ongoing innovation, great optionality, and strong growth?

Many payments companies do feel utility-like at first glance, as they have favorable secular growth trends, contracted and recurring revenue, low capital intensity, serving markets that have entrenched payment habits, and regulation often protecting incumbents. Many “first movers” have grown into market leaders and large businesses over the last 20 years; however, the legacy owners are often reticent to push a change agenda.

Our view is that status quo is not an option in payments today. Regulation and technology are driving marketplace change and lowering barriers to entry and creating more competition. It has never been easier to enter and build scale in payments.

A typical conversation with an incumbent owner is, “you have a great asset in a great market, but every day you do not invest, you are putting that business at risk of losing its competitive edge in the future – and as soon as this becomes obvious, it becomes hard to control and the asset will be worth a lot less.” Payments is an attractive and growing market, but you need to invest to take advantage of it.

4. Both liquidity and valuations have never been better in payments M&A, do you expect these conditions to persist for some years to come?

We expect these conditions to persist for the foreseeable future. Both public investors and private equity have “discovered” the sector ,learning that these once back-office activities can be lifted out to become standalone technology companies with defensive financial characteristics, above GDP growth, revenue predictability, and high return on capital. Increasingly, public investors are viewing established payments assets as a “safe haven” in periods of high volatility or macro uncertainty.

There is now a deeper understanding of the business model and the strategic value of the payment service provider. The combined effect of i) the evolution of retail with emergence of themes such as omni-channel and big data, and ii) the technology and innovation in payments has drawn attention to the importance of payment services and the provider of such services as strategic partners.

In fact, some technology investors see payments as fairly valued compared to opportunities they are evaluating in other areas like enterprise software that have a similar growth profile. And the most creative investors see interesting upsides such as big data services, which is largely nascent in the payments industry today. This all makes previously boring utility companies exciting and strategic, driving M&A interest.

5. Are there any sectors within payments in particular that you see as most interesting for generating future opportunities?

Over the last few years, we participated more in the merchant-facing end of the industry as this space is more fragmented and there is a better opportunity to own the end-customer relationship, which we feel is better placed. But, that said, we have done deals in almost every part of the value chain.

We get most excited when we see an opportunity for transformation, regardless of the sub-segment of payments – places where we can change governance, increase capital investment and use our industry knowledge to support management in accelerating their industrial plan.

This is why we spend a lot of time visiting banks in Europe, educating them about our partnerships with their banking peers in other markets, and discussing their vision for their payments assets and how we might be able to help in a flexible way.

6. How do you think about the end-game for payments in Europe? For example, is consolidation real or will ongoing innovations continue to give rise to a fragmented supply of payment service providers?

We believe the payments industry in Europe is still at the beginning stages of consolidation and that this consolidation will continue to play out over a 5 to 10 year period. We are only half way through the phase where assets transition from bank ownership to private/public ownership as independent entities. As private equity investors, we have played a key role in this phase, helping carve assets out, driving operational improvement, and putting them on a more long-term sustainable growth path.

As growth inevitably slows, we see consolidation among about the 10 largest public and private companies leading to an end game of three or so players with the potential for substantial market caps. This would be similar to how consolidation has played out in the cable and telecom sectors.

7. For our many clients in the industry that could potentially consider a sale to financial sponsors such as Advent and Bain Capital Private Equity, do you have any particular advice on how best to consider alternatives and to prepare for a sale?

In general, we spend a lot of time with banks that own large payment businesses. There are two points that we generally try to get across in our discussions:

  1. It is not necessary for the bank to own a payment business to offer its clients the best service and support on payment activities.
  2. Payments is a fast changing landscape and a payment business that misses focus, investments, and full dedication to its shareholders will likely lose share and value in the future.

These two points help to drive home the question of who is the best positioned to own the business.

There is no one-size-fits-all approach. Every deal we do in payments is tailor-made to the needs of the sellers, often at an individual bank level. Some want to sell, others want to keep a financial stake, still others want to influence the future product road map. One of the reasons for our success has been the fact that we bring to the table both the industrial perspective of a strategic and the financing and flexibility of a financial sponsor.

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