Track record allows CVC to stay tight on terms

The €16bn Fund VII commanded €30bn of interest, despite a 6 percent hurdle rate and no early-bird discount.

Private equity fund managers must justify the very high cost of the asset class to its investors through superior returns every time they raise a fund, or savvy investors will take their capital elsewhere.

That was the message from CVC Capital Partners’ investor relations partner Marc St John, before the launch of the firm’s latest fund, which has just closed on a record-breaking €16 billion.

“If we can’t do that – and as I just said, a lot of the GPs had difficulty with that in the global financial crisis – you’re going to have to lower your prices,” he told delegates at a panel at the BVCA Summit 2016 in London in October.

CVC has clearly had no trouble justifying its fees to investors; after just five months in market, CVC held a ‘one-and-done’ on the largest euro-denominated fund in private equity history. And it could have raised it twice over.

The fund officially launched in January with a €12.5 billion target. A month later the firm held two due diligence weeks – one at the Savoy Hotel in London and one at the Park Hyatt in New York – where its investment professionals from around the world gathered to answer investors’ questions.

LPs then had until 8 May to submit commitment documents for the vehicle, as reported by PEI.

All in all, CVC held more than 1,500 LP meetings over the five-month fundraising, including those conducted during the two due diligence weeks.

CVC Capital Partners VII received €30 billion-worth of interest from LPs despite offering no early-bird discount and lowering its hurdle rate to 6 percent.

Even with talk of GPs tightening the fund-term screws on LPs in the incredibly buoyant fundraising environment, it is still only those firms that are producing exceptional returns that are gaining much traction. Mediocre fund managers need not apply.

CVC has the track record to back it up: the firm has fully exited 120 of the 154 investments it has made since it began investing Fund I in 1996, and these have generated a gross multiple of 2.2x and a gross internal rate of return of 26.3 percent, according to documents prepared for the New Jersey State Investment Council's 29 March investment meeting seen by PEI.

It is certainly no coincidence that the other mega-fund to mess around with the sacred 8 percent hurdle rate on its recent fundraise is Advent International, which scrapped it entirely for its $13 billion Fund VIII.

It, too, is on the higher end of the returns spectrum compared with its mega-fund peers. The 2012-vintage Advent International GPE VII, which closed on $10.8 billion, was delivering a 15.1 percent IRR and a 1.3x return as at 30 June 2016, according to the California Public Employees’ Retirement System. Its sixth fund has an IRR of 17.5 percent and an investment multiple of 2.0x, while its fourth and fifth funds are posting impressive IRRs of 52 percent and 42.8 percent respectively.

Documents prepared by StepStone for the State of Connecticut Retirement Plans and Trust Funds and seen by PEI put these in context. CVC’s risk-adjusted performance – defined as gross TVM over (1 plus the loss ratio) – from 2002 to 2012 is 2.0x. That puts it ahead of European peers Cinven, with 1.8x, Permira, with 1.7x, Apax Partners, with 1.6x, and BC Partners, with 1.5x. Advent International, meanwhile, delivered 2.5x, a result only equalled by Clayton, Dubilier & Rice.

CVC’s sixth fund is around 80 percent invested, and the expectation is Fund VII will be activated at the beginning of 2018 at the latest, deploying between €3 billion and €4 billion per year. As with Fund VI, capital will be called down from LPs just once per year, with a subscription credit line used to bridge investments.

Despite a downward trend in private equity returns across the board, CVC still has high expectations for this fund, targeting a gross IRR in excess of 20 percent and a gross multiple of at least 2x, according to the New Jersey documents. If it manages that, its IR team will have a good chance of justifying its fees to investors next time around.