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Private Equity Firm CVC Turns Transition into Growth

CVC Capital Partners has gone from strength to strength in the wake of chairman Michael Smith’s departure.

When Michael Smith, the chairman of London-based private equity group CVC Capital Partners, stepped down last fall, he managed to do something simple that many financial firms have failed to do in the past: He successfully navigated his succession.

Succession has been a problematic issue at other financial firms, and private equity firms are no different. There is constant speculation about who will eventually take over at Blackstone from Steve Schwarzman and Hamilton James, and Apax Partners chief executive Martin Halusa is staying on past the firm’s normal retirement age of 60 to see the latest fund through its investment phase. Meanwhile, at Charterhouse Capital Partners, a tussle for leadership among senior partners saw a favourite for the top post rejected and another leave the firm.

Smith’s exit from the top spot at CVC addressed the issue of how long he would sit at the head of the firm and who would succeed him, before it became a problem and a cause for concern among investors. Smith, who joined CVC 30 years earlier, when it was still part of New York–headquartered Citigroup and had overseen the spinout from its banking parent in 1993, would be replaced by three co-chairmen — Donald Mackenzie, Rolly Von Rappard and Steve Koltes — among the firms’ longest-serving and most respected partners.

The three, all in their 50s, have committed to stay with the firm until about 2020. Mackenzie, who led CVC’s investment in motor racing series Formula 1 — one of its most successful recent deals — will be in charge of investment. Von Rappard, credited with establishing the firm’s presence in the U.S., will carry the day-to-day running of the firm. And Koltes, who was in charge of CVC’s business in German-speaking Europe, leads fundraising and investor relations.

The success of the move can be seen in the fundraising that CVC embarked upon just after his departure, in the middle of one of the toughest climates for raising capital that the private equity industry has seen.

In existence since 1981, CVC is one of the largest Europe-focused private equity groups, having raised $50 billion from investors and made some 300 investments. Being one of Europe’s first to push into North America and the emerging countries of Southeast Asia, the firm has made no bones about its ambitions to grow internationally. CVC declined to comment for this story.

Less than one year on from Smith's departure, CVC told investors that appetite for its sixth European buyouts fund would push it well past the €9 billion target ($11.7 billion) and the €10.5 billion self-imposed limit, meaning it may have to turn some investors down. Far from floundering, CVC has cemented its position among the top tier of private equity houses, thanks to its well-regarded investment team and its track record, which beats most of its rivals. The speed with which CVC has raised money and the size of the latest fund are in stark contrast to many big-name firms, including New York–based Blackstone, or London’s Apax Partners and Permira, which have taken years rather than months to raise capital and have fallen short of their initial goals. As investors focus on fewer managers and concentrate only on the best performers to strengthen those relationships and improve returns from their portfolios, CVC has become a magnet for their capital.

In keeping with many private equity groups, CVC set a slightly more modest target for its latest fund than its fifth in 2008, for which it raised €10.8 billion. But like Boston-based Advent International, which burst through its target by €1.5 billion to raise €8.5 billion ($10.8 billion), just as CVC’s Smith was announcing his retirement, it has seen more demand than it can potentially accommodate. CVC told investors it guaranteed they would receive their desired allocations only if they submitted their documents before a first close in mid-July. If they made commitments after that point, they could receive less than they hoped for, or nothing at all. The small incentive for early commitments — a 7.5-basis-point reduction in the standard 1.5 percent annual management fee — hardly seemed necessary. In the end, CVC raised €10.25 billion at first close, with a handful of investors having promised a further $250 million that will have cleared legal hurdles by the end of the year.

“Investors have reserved capital for CVC. It was the must-do fund of this year, as Advent was the must-do fund of last year,” says an investor who manages money on behalf of a European pension fund (and who declines to be named). He, like other limited partners he knows, held back capital in anticipation of CVC’s fundraising and is cutting the number of European large-cap funds in his portfolio by about half to be able to put more money with the top firms and cut the weaker performers from his portfolio.

The culling of the number of firms investors are prepared to back has meant passing on other firms such as Apax, which this year raised €5.8 billion instead of the €9 billion it wanted, and Permira, which is still trying to raise capital after two years’ fundraising. Permira held a first close on its fifth fund earlier this year of €2.2 billion and cut its target to €4 billion to €5 billion from €6.5 billion.

At the heart of CVC’s fundraising success is its investment track record. Standard Life European Private Equity Trust values CVC’s fifth fund at 1.3 times its investment and its fourth fund at 2.1 times, eclipsing most rivals. In comparison, Europe-focused buyout funds from 2008 have delivered 1.21 times their investment on average and top-quartile funds more than 1.39 times, according to figures from data group Preqin, placing CVC well within the top 50 percent. The performance of its 2005 fund ranks higher — the average European buyout fund from that year returned 1.37 times, and the top-quartile boundary sits at 1.83 times, according to Preqin.

However, the firm’s performance has not been entirely blemish-free. Last year CVC lost control of Australian media group Nine Entertainment, based in Sydney. That loss wiped out most of the A$1.8 billion ($1.85 billion) equity CVC had ploughed into the company since 2006 – money that had come out of four funds, including its fourth Europe-focused buyout fund, which has authority to invest a minority of its capital outside the Continent.

Forays into other regions beyond Europe have been more successful, the investor said, highlighting recent investments in the U.S., including retail warehouse operator BJ’s Wholesale Club in 2011, which CVC bought alongside Los Angeles–based private equity group Leonard Green & Partners for $2.8 billion. A year earlier CVC had invested an undisclosed amount to buy into Leslie’s Holdings, a supplier of swimming pool cleaning products, alongside Leonard Green and other investors. Both businesses were strong national, as opposed to international, businesses and cheaper as a result.

Being one of the world’s largest buyout funds puts the firm in a strong position to compete for new deals. It has the firepower to go after medium- and large-sized deals without calling in co-investment from larger limited partners, and that adds certainty to sellers and bankers running sale processes that not all competitors can offer. While much of Europe was on summer vacation in August, CVC was sealing or putting the final touches on three European deals: the £750 million ($1.2 billion) purchase of Domestic & General Group, the U.K. provider of home appliance warranties; the €600 million acquisition of online payments firm Skrill Group, and the buyout of the European soups and sauces business of New Jersey–based Campbell’s Soup Co. for around €400 million.

Having cemented its place as one of the best firms, the new fund gives CVC a mandate to become one of the biggest. Last year, the firm sold a 10 percent stake in the firm’s management company to the Government of Singapore Investment Corp (GIC), Hong Kong Monetary Authority (HKMA) and Kuwait Investment Authority (KIA). The sale raised money to expand the businesses geographically and develop its debt management arm, CVC Credit Partners, with $9.6 billion in assets.

“Altogether, CVC has the kind of virtuous circle going that could help them into what is today the exclusively American-based group of global megafirms,” said Antoine Drean, chairman of Paris-based Triago, a firm that helps private equity groups raise money from investors. Unlike those U.S. giants, Blackstone and New York-based KKR, or Washington headquartered Carlyle Group, CVC has its sights on growing while remaining a private partnership.

As with Advent last year, the speedy and successful fundraising puts clear blue water between CVC and most of its peer group and lets deal makers get on with investing without distractions or worries about cuts. That makes it a magnet for top investment talent, adding even more luster to the brand. After a year of changes, CVC has emerged as one of the clear winners from the midst of the financial crisis, having laid the groundwork to transform from a European buyout house to a global investment firm.

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