If CVC is to achieve a decent listing of its own, it must still overcome some challenges. — Bloomberg
CVC Capital Partners isn’t a publicly traded private equity business yet – but it’s already acting like one.
The buyout firm preparing for a possible initial public offering (IPO) is splashing out on mergers and acquisitions, adding a new investment style to its portfolio and growing its assets under management.
This may be what London-based CVC’s listed counterparts are up to, but the approach comes with risks.
The investment industry has become polarised between low-fee passive funds and alternative strategies promising higher returns for higher fees. Meanwhile, alternative asset managers also want to become even more alternative than each other.
In purchasing Netherlands-based DIF Capital Partners, CVC will gain infrastructure funds and increase its managed assets by 10% to €177bil (US$190bil).
Its two main geographically focused buyout funds will still account for over half of the business, but only just.
On one view, this acquisition can be seen as a reaction to the challenges facing the traditional activity of private equity investing.
Cheap and plentiful leverage for buying companies is no longer available, and the industry can no longer bank on rising equity markets to deliver highly profitable exits.
Infrastructure investments have different dynamics – a lengthier time horizon, lower return hurdles and assets with inflation-linked cash flow. That said, they are scarcely immune to the rising cost of capital.
A better prism through which to view CVC’s move is probably the philosophy of diversification, which has a grip on some parts of the industry.
The idea is that being able to offer a smorgasbord of strategies gives your firm an advantage in attracting fresh money to play with. This is particularly relevant to those outfits that are listed.
Stock market investors may not assign much value to the unpredictable performance fees earned by private equity, but they do like the stable and predictable revenue streams that come from management fees, which rise with the total sums put to work.
In turn, the chances of a buyout firm executing a successful IPO will be boosted by demonstrating the ability to grow that fee pool by gaining new clients, known as limited partners (LPs), or getting existing LPs to hand them more funds.
At least that’s the thinking that helped European private equity listings get done in recent years. CVC is paying roughly €1bil in cash and stock for DIF.
At around 6% of managed assets – an admittedly crude valuation benchmark – that’s in line with the target’s most obvious listed peer, Paris-based Antin Infrastructure Partners SA.
There won’t be much cost to cut – the plan is to allow DIF “independence over its operations and investment decisions.” Detailed financials weren’t given.
How pricey the takeover is depends on DIF’s current profitability and whether the combination can grow assets faster than they might have done as separate entities.
A one-stop shop doubtless has some advantages. The question is whether these are much more than marginal.
Timing wise, CVC did well. It reportedly raised debt privately as the boom was peaking in 2021; Antin’s stock market value has almost halved relative to its IPO price in the same year. It’s buying with yesterday’s cheap money at today’s depressed valuations.
Of course, one of the benefits of going public is to use the listed shares as an acquisition currency. Here, a takeover may be helping to facilitate an IPO rather than the other way round, to the extent that investors still buy into the diversification theme.
But if CVC is to achieve a decent listing of its own, it must still overcome some challenges. Shares in the European-listed benchmarks are in the doldrums.
True, the stock prices of US rivals Blackstone Inc and KKR & Co haven’t performed so badly, but investors in CVC’s yet-to-be-confirmed Amsterdam listing will be comparing locally.
CVC also needs to be careful in how it integrates this deal and avoid the trap of focusing more on gathering assets than driving the performance of those already in its care. Diversification may pull clients in.
Returns are what keeps them coming back. — Bloomberg
Chris Hughes is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
