Three things to know about CVC’s latest long-dated fund

The private equity giant's second long-life vehicle is targeting up to a dozen deals with at least €1bn of co-investments.

CVC Capital Partners gathered €4.6 billion for Strategic Opportunities II, the only second-generation long-life fund in the industry.

Lorne Somerville
Lorne Somerville

Strat Opps is about 20 percent larger than its predecessor, which secured €3.9 billion in 2016. More than 20 LPs contributed to the fund, which saw strong backing from Asian investors, as well public and private pensions, sovereign wealth funds and endowments.

Private Equity International caught up with Lorne Somerville, managing partner and co-head of Strategic Opportunities, to find out more about the vehicle.

Strat Opps has more in common with CVC’s main fund

Both the latest fund and CVC’s flagship fund are active strategies, with the firm managing the boards of its companies and agreeing on a value creation plan with management in every case.

One difference is that it can be much longer-term about the value creation plan and put in initiatives that take longer to mature. Replacing a customer relationship management system or billing system can take years to get right.

“You don’t want to hurry them,” Somerville said. In the Strat Opps fund, CVC can afford to implement systems over a longer period of time, he added.

LPs’ main question on Strat Opps is how it distinguishes itself from the main fund, such as whether the strategy increases LPs’ deal-sourcing capability, whether it can offer more co-investment opportunities or drive investments effectively, Somerville added.

Co-investment is a focus

Co-investments will remain an important part of the strategy. The firm delivered over €1 billion of co-investments in the first fund and expect to at least match that in the second, Somerville said. He is aware of concerns that CVC would be competing with LPs who have large direct programmes.

“What they’ve seen is how compatible we are with the big directs programmes because we are an active investor. We have the advantage of a dedicated team of 10 but we can theoretically flex up to 220 professionals and can bring all of the sources of CVC to bear.”

The firm is targeting between 10 and 12 investments for Fund II, more than the seven deals it sealed for Fund I. Somerville noted that the Strat Opps team looked at over 450 opportunities through the duration of Fund I and expects to screen more this time.

“To make an investment work that has really the right risk-return profile, you need to turn over a lot of stones,” he pointed out.

It’s all about low risk investing

Going deeper on how Strat Opps distinguishes itself from the core PE fund, Somerville said the team focuses first on the risk. Strat Opps looks for companies that have a lower operating risk and lower financial risk.

“We’re delivering the same risk-weighted return as the main fund, which means if we are looking at lower risk we can accept a lower return but a more predictable one. So, this means a narrower, but more predictable range of outcomes.”

It will also be a combination of duration environment, structure and leverage that delivers that kind of more predictable lower risk, and therefore an acceptable commensurate lower return, he added. On the use of leverage, for example, it could be that the company doesn’t accept leverage or will only accept a much lower level of leverage, which reduces the risk, but again can also reduce the return.

Somerville also noted the firm is comfortable with minority investments as long as it has sufficient influence.