CVC Muscles Past Competitors as Fundraising ShrivelsKiel Porter
Apax Partners LLP spent 15 months raising 5.8 billion euros ($7.5 billion) for its next buyout fund while CVC Capital Partners Ltd. attracted 7 billion euros in just six months, a sign investors are rewarding top performance among Europe’s private-equity elite and shunning anything less.
Apax closed its latest pool today while CVC is expected to disclose its fundraising efforts next week, according to a person with knowledge of the matter, who asked not to be identified because the plans are private. The results will serve as a benchmark of the differing fortunes of Europe’s “Big Five” buyout firms, which are set to net about 25 billion euros in their current fundraising round, slightly more than half what they raised before the financial crisis of 2008.
“The reality is that limited partners have insufficient liquidity to recommit to all their existing relationships,” James Moore, managing director and global co-head of the private-funds group at UBS AG in London, said in an interview. “This is particularly the case when it comes to funds operating in the larger end of the market where the majority of capital was raised pre-crisis. LPs are consolidating relationships.”
The change in investor attitudes and the region’s stagnant economy has seen the hegemony of Europe’s “Big Five” firms -- Apax, CVC, BC Partners Ltd., Cinven Partners LLP and Permira Advisers LLP -- fracture. CVC’s new fund is in such demand that it has set a limit of 10 billion euros, according to two investors with knowledge of the plans, who asked not be identified because the information is private. Apax and Permira have cut the size of their new funds, reducing fees and fixed compensation at the firms.
It now takes an average of 18 months for a manager to complete raising money for a fund, according to London-based data provider Preqin Ltd., up from 14 ½ months in 2008. Sentiment toward buyouts of more than 1 billion euros is also changing, with just 19 percent saying such transactions offer the best investment opportunity compared with 39 percent for smaller deals, Preqin reports.
The shift in strategy has been most pronounced at London-based Permira, which in 2008 was Europe’s largest buyout firm, having raised a then-record 11.1 billion euros for its fourth fund, Permira IV, two years earlier.
The firm’s focus on larger transactions backed by debt saw much of its portfolio, including its investment in the $17.6 billion purchase of Austin, Texas-based technology group Freescale Semiconductor Ltd., suffer under their debt burden and valuations fell across Fund IV going into the crisis. Investors including its then-largest backer, London-based SVG Capital Plc., cut unused commitments by as much as 40 percent.
In response, Permira made “substantial efforts to take costs out of the portfolio,” said Kurt Bjorklund, 44, who took over as co-managing partner in 2008. “A lot of work went into stabilizing capital structures, including re-purchasing debt at a discount.”
Permira also began doing smaller deals, which focused on the industries it knew best to improve returns, he said.
With memories of the losses on earlier transactions still fresh and profits from newer investments largely yet to be realized, Permira found it difficult to attract investors for its latest fund. The firm spent 18 months raising 2.2 billion euros for its new fund, making it unlikely to reach its revised 5 billion-euro target, which had been cut from 6.5 billion euros. The size of the fund, in turn, will reduce Permira’s fees and employees’ fixed compensation.
Bjorklund, while declining to comment on fundraising, said he was comfortable no longer being the largest European firm.
“The model with smaller funds is shifting to being once again more aligned” with investors, he said. “The vast majority of the incentive is back to being based on performance and linked to the profits we generate for our investors and that is a good thing.”
Apax will also have to adjust to making fewer investments with its new fund, Apax Partners VIII, 40 percent smaller than its 2008 predecessor. That fund, which replaced Permira’s as Europe largest when it closed at 11.2 billion euros in March 2008, has had strong performers such as India-based Apollo Hospitals Enterprise Ltd. offset by investments such as U.K medical courier Marken Ltd., on which the firm lost its 600 million-pound ($937 million) investment last December. Those losses have hurt investor enthusiasm for its new pool.
“Over the years our best returns have come from insights driven by deep sub-sector knowledge, having tracked the company for a long period of time,” said Mitch Truwit, 44, an Apax partner and member of the executive committee. “The corollary to that is where we have bought a business on a more opportunistic basis at a higher entry multiple because the debt enabled it we have done less well.”
Truwit, who declined to comment on fundraising, said the firm has refocused by discontinuing investments in areas such as banking and print media, closed its offices in Italy and Spain and cut the number of investment employees by 10 percent.
While Permira and Apax are scaling back their funds, CVC is thriving amid strong returns from investments such as London-based motor racing group Formula One Holdings Ltd., from which CVC and other shareholders are poised to collect $2.2 billion in dividends, according to an October report by Moody’s Investors Service. The firm’s 2008 fund may generate about 2.3 times its investment, a top-quartile return, said an investor who asked not to be identified because the results are private.
CVC is the only one of Europe’s five largest buyout firms that has successfully diversified its business with a debt affiliate, CVC Credit Partners Ltd., increasing assets under management fourfold since 2008 to $8.5 billion.
The rise of the credit business has complemented rather than detracted from the success of the private-equity business, said Marc Boughton, 49, managing partner at CVC Credit Partners.
“Following the crisis, investors are looking to expand their relationships across product groups,” he said. “This trend, associated with increasing regulation, changing markets and the infrastructure required to support fund management further supports the growth in private asset managers such as CVC to support their investors and provide access to private equity, private debt, infrastructure and real estate.”
Boughton declined to comment on fundraising.
BC Partners and Cinven, the other two of Europe’s five largest firms, have also been able to raise new funds at or above their targets despite suffering losses in their portfolios.
“Some firms have adjusted their strategy since the crisis, and they may be right to do so, but we have chosen not to,” said Raymond Svider, co-managing partner and co-chairman of London-based BC Partners, which finished raising its ninth fund last year. “We remain extremely focused on downside protection first with growth being only a secondary attribute.”
Strategy has also remained largely unchanged at London-based Cinven, which last week finished raising 5.3 billion euros for its fifth fund, topping its 5 billion-euro target. It has cut the level of debt in deals in its fourth fund to an average of about 4.3 times earnings from 5.7 times in 2008, according to a person with knowledge of the matter.
“Focus is a good thing in our business,” said Hugh Langmuir, who took over as managing partner in 2009. “We see a lot of opportunity here in Europe and haven’t felt driven to look at new markets.”
Svider and Langmuir said diversification and initial public offerings for their companies were off the table. Cinven’s partners sold their interest in London-based debt-advisory firm Indicus Advisors LLP in August 2011, leaving both focused on buying similar companies. BC Partners does have a New York office and expects as much as 25 percent of its future deals to be in North America, while Cinven is purely focused on Europe.
“Investors are capital constrained and cannot back every existing relationship,” UBS’s Moore said. “The much-used term bifurcation is indeed happening. A few big funds have or are receiving strong support. Many others are finding it a hard slog and some will have to radically reshape as a result.”