Deal Mechanic: Copied right

When Cinven acquired intellectual property business CPA Global in 2012, it hoped to replicate the success it had achieved with its exit from transaction processor Amadeus the previous year.

There were striking parallels between the two companies: both had originally been founded and owned by their customers and both boasted significant room for technological growth. Cinven had earned a 7x return on its 2011 exit from Amadeus, which had been founded by a group of airlines, after heavy investment in research and development, and saw similar potential within the patent renewals sector.

“IP law firms had set up the company to manage transaction processing activity [an admin-heavy task] more efficiently than the law firms could do themselves, and they had also developed a nascent software offering,” Anthony Cardona, principal at Cinven, tells Private Equity International.

“We saw an attractive market opportunity: serving corporations and law firms globally to help them manage their patents through technology. Every year the number of patents has increased and it’s continuing to increase at a very strong rate as corporates and law firms want to protect their innovation globally.”

While patent drafting attracts much of the credit in intellectual property, renewing these documents can be a laborious process complicated by the need to file, renew and pay in multiple currencies and jurisdictions. Jersey-headquartered CPA Global was initially set up as a co-operative venture of patent attorneys in which the workload was shared evenly across the group.

In 2010, CPA’s shareholders were keen to sell a minority stake in the business, and Cinven was interested. However, the firm’s mandate required it to take control positions in portfolio companies and the opportunity was instead snapped up by London-based private equity firm Intermediate Capital Group.

“As is sometimes the case you see a very attractive business but what’s on offer doesn’t square with what your mandate permits you to do,” says Stuart McAlpine, managing partner at Cinven.

Patience is a virtue, and in late 2011 ICG agreed to sell a majority position to Cinven for around £950 million ($1.2 billion; €1.1 billion). CPA Global marked the last investment from Cinven’s fourth fund, a €6.5 billion 2006-vintage.

1 SYSTEM UPGRADE

Cinven’s strategy for CPA Global was to continue to grow its renewals business while simultaneously building the efficacy of its software offering. The firm wanted to provide its customers who were operating “in a kind of Heath Robinson-type way with Excel spreadsheets and manual interventions” with a tailored software solution, McAlpine says.

Although the company already had a disparate range of software products, Cinven hoped to build on this by creating additional products and pursuing acquisitions, before unifying these into a larger suite.

The acquisition of Austin-based IP search and analytics software provider Innography in 2015 catalysed the company’s technological development. In addition to boosting CPA’s range of software products, Innography founder Tyron Stading joined as chief data officer. CPA Global now boasts a single sign-on environment providing access to each of its products, as well as a new web-based suite of IP management software launched in June.

2 BUY AND BUILD

The second prong of CPA’s growth strategy was to acquire renewals portfolios within attractive markets and jurisdictions where the company was under-represented, such as the Nordics and Asia. The company made six additions funded through a mix of cashflow and bank facilities.Buy and build

In 2014, CPA Global acquired Sweden-based Patrafee IP services provider for an undisclosed sum. The deal included Patrafee’s patent renewals business, IP management software products and UK operations.

The same year saw CPA boost its search and analytics capabilities through the acquisition of Virginia-based international patent services provider Landon IP, which held offices in London, Shanghai and New Delhi.

It was these Asian markets that held the highest potential for growth.

“[South Korea] is one of the most innovative economies in the world,” Cardona says. “They have one of the highest levels of patents per capita of any economy, and the number of patents coming out of South Korea is growing very strongly.”

CPA attempted to tap into this momentum with the acquisition of its former renewals business partner, MarkPro, in South Korea. The deal helped CPA become the “number one player” in the South Korean market, Cardona notes.

The company has also become the largest IP services provider in China, taking advantage of the country’s exponential patent growth with offices in Shenzhen, Beijing and Shanghai.

3 FINANCING

The firm’s acquisition of CPA came amid some of the weakest capital markets conditions since the recession. “It was one of the few LBO financings in the European market at that time,” Matthew Sabben-Clare, capital markets partner at Cinven, adds.

The firm was able to secure underwriting for a debt financing from some of its relationship banks, in addition to placing a mezzanine tranche with a combination of its long-term institutional lenders and LPs.

Raising the necessary debt in sterling can be difficult as many institutional investors in leveraged loans are not funded in sterling, explains Sabben-Clare, resulting in expensive cross-currency swaps for the duration of the loan. In 2013, the firm decided raising debt in dollars and euros would be a more natural fit for CPA’s increasingly global nature.

Cinven fully refinanced CPA’s London-based debt from the previous year and replaced it with a New York covenant-lite dollar and euro first- and second-lien loan structure. The exercise generated a more diversified pool of lenders for the company that proved useful when it made subsequent acquisitions.

The same year CPA refinanced its initial mezzanine debt, reducing the weighted average cost of debt by nearly 2 percent.

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After five years of ownership, CPA had grown into the world’s leading patent renewal and IP management software company with the likes of Microsoft, Canon and Unilever among its 10,000-strong client base.

As its holding period neared an end in early 2017, Cinven launched a dual-track process with Goldman Sachs and JPMorgan to explore IPO and trade sale options.

The company attracted the attention of private equity firms “in the double-digits”, says McAlpine, but a pre-emptive £2.4 billion offer from Leonard Green & Partners proved too good to turn down. “The bids were very competitive, you got a sense of the attractiveness of the asset and the sector,” McAlpine says.

“We arrived at a position over the weekend where [Leonard Green & Partners] came forward with a value which was sufficiently compelling for us not to go down the IPO track,” McAlpine notes.

Cinven declined to comment on the financial returns, but one market source who asked not to be identified says the deal generated a 3x money multiple, 24 percent internal rate of return and a more than €1 billion capital gain for investors.