CVC’s cross-fund purchase
“The GP’s prickly friend” is how one lawyer described to us two years ago the type of deal in which a sponsor sells an asset and reinvests in a minority stake in the same asset via a separate fund. “Prickly” because such transaction can be rife with conflicts of interest to navigate; “friend” because sometimes, one of the most attractive investment opportunities can be sitting right under a GP’s nose.
The latest example of such a deal – sometimes referred to as a rollover co-investment – appears to be CVC Capital Partners‘ transaction with business services company TMF Group in which it sold a 50 percent stake to Abu Dhabi Investment Authority and will reinvest via its long-hold fund, as the FT reported yesterday (subscription required). Meanwhile, Bain Capital said this morning that it has sold a stake in labels and packaging products maker Fedrigoni to BC Partners, while reinvesting and retaining joint control with BC (a slightly different deal to CVC’s given both firms have joint control).
Rollover co-investments are not new. Permira, Nordic Capital, EQT and Neuberger Berman have all run such deals. Thinking of doing similar? Here are some key things to bear in mind, per Alex Green, a partner at Macfarlanes:
- As the reinvesting GP, you’ll need a fundamental change in mindset re: the portfolio company. Going from deal sponsor and lead investor to co-investor invariably means relinquishing control of the portfolio company’s destiny, and ultimate timing and manner of exit.
- GPs also need to make sure they’re comfortable with the new lead investor from a relationship and strategy perspective.
- As the new majority investor, you’ll have control of the asset and final say on key decisions, but this may be tricky given the former control owner remains a minority investor. A minority owner who’s engaging in some ‘backseat driving’ may create tensions.
- As the new lead investor, you may find you’re under pressure to accede to more favourable co-investment terms than you’re used to, especially around veto rights and exit provisions. Negotiating these can be tricky.
Read Green’s full analysis here.
BCI’s benchmark beater
BCI, the world’s 30th largest PE investor according to the GI 100, reaped the rewards of its rising enthusiasm for direct investing in the year to 31 March. The C$211 billion ($164 billion; €161 billion) public pension posted a 29.7 percent one-year net return for PE last year against a 19.5 percent benchmark, according to its annual report this week. PE also delivered a 21.5 percent return versus a 15 percent benchmark over five years. It was in 2016 that BCI decided to allocate more to co-sponsorships and co-investments, which have grown from one-fifth of PE assets at the time to almost two-fifths today. Here are some other takeaways from the report:
- PE represented C$24.8 billion, or 11.8 percent of net assets, compared with C$20.7 billion at the end of the previous year.
- BCI sold approximately 70 PE funds on the secondaries market last year, freeing up roughly C$2 billion to redeploy into high-performing managers that support sourcing of BCI’s direct opportunities.
- The investment team committed C$6.8 billion in total client capital, the most of any year for the PE programme, including C$2.2 billion in directs and C$4.6 billion in funds.
- Total PE distributions for the year amounted to C$8.5 billion, over C$6 billion more than the previous year.
While we’re on the subject of earnings, PEI Media-owner Bridgepoint published its interim results this morning. The London-headquartered firm collected €4 billion in a first close of Bridgepoint Europe VII in the period, and has held further closes since, with the vehicle now in the “final third” of its €7 billion-target raise.
The transition to this fund from its predecessor is expected to have occurred in May 2022, subject to competition clearance on Fund VI’s final investment. Unlike some of its peers, which have struggled with exits in this uncertain and volatile environment, Bridgepoint recorded €3 billion-worth in H1 2022, compared with €2.1 billion in the equivalent period last year. Highlights include a 7x return on consultancy business HKA to PAI Partners and a 4x on the sale of UK homebuilder Miller Homes to Apollo Global Management.
Clearlake’s second thoughts
Secondaries firms have become hot property in recent years, as Ares Management, CVC and Franklin Templeton – each of which have snapped up a dedicated unit – can attest. PE giant Clearlake is another that came close to joining that list. In recent months, the firm came near to acquiring asset manager Portfolio Advisors, primarily as a way to bolt on secondaries investing functionality to its franchise, our colleagues at Buyouts reported this week (registration required).
Portfolio Advisors this year engaged Moelis & Co to explore several unsolicited offers the firm received from potential strategic partners. The deal with Clearlake likely didn’t happen because it was predominantly interested in secondaries, which only makes up over one-third of Portfolio Advisors’ total business. It is not clear whether Clearlake remains interested in buying a secondaries group.
Secondaries continues to attract new entrants after hitting a record $130 billion of volume last year. Along with firms acquiring existing secondaries groups, some are hiring senior people to build out secondaries capabilities. Apollo has appointed three executives from BlackRock to work on PE secondaries; meanwhile, Audax Group hired two executives from DWS Group this year to build out a secondaries strategy, the WSJ reported.
Today’s letter was prepared by Alex Lynn with Adam Le, Rod James, Carmela Mendoza, Helen de Beer and Madeleine Farman