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CVC tightens fundraising terms after strong demand for new fund

Cover of The Debt Trap by Sebastien Canderle Private equity group attracts €25bn-€30bn of demand for its latest buyout fund

BY JAVIER ESPINOZA

CVC Capital Partners has tightened the terms being offered to new investors in its latest buyout fund after the private equity group attracted demand for double the amount it is seeking to raise.

CVC, Europe’s biggest private equity group, will cut the hurdle rate for its fees and scrap the early-bird discounts typically offered to new investors after identifying between €25bn and €30bn of demand for its latest buyout fund, according to two people familiar with the investor talks.

In the latest sign of the strong demand among institutional investors for proven fund managers, CVC will cap its next fundraising at €15bn in what will become Europe’s largest by a private equity group since the crisis.

The move comes as other managers seek to maintain higher management fees, and even restrict the time that key management spend on a single investment, in further signs of the strength of the industry at a time of low returns elsewhere for investors.

In November last year, Advent International removed the hurdle rate entirely from its latest fund, which closed after raising $13bn. Investors in funds traditionally receive a return of 8 per cent on deals before managers can begin cashing in on carried interest, the fee that private equity groups levy on their clients when they sell investments at a profit.

Demand from investors — typically large pension funds and sovereign wealth funds — is such that CVC is expected to take all investments in a single “one and done” deal, a relatively unusual move, analysts say.

CVC, which sold Formula 1 motor racing to Liberty Media in September, will start the formal fundraising process in January after gauging the strength of demand through informal talks with investors. The group is expected to close its fundraising with a target of at least €12.5bn by the end of the second quarter of next year, say people familiar with the plans, but the group will also cap the fund’s size at €15bn.

Some of the largest pension funds and investors, including the Canadian Pension Plan Investment Board (CPPIB) and the California Public Employees’ Retirement System (Calpers), have expressed interest in CVC’s fundraising, say people close to the fundraising.

CVC declined to comment. CPPIB and Calpers declined to comment.

Managers changing their terms during fundraising were redressing the balance following investor-friendly changes made since the financial crisis, says Jason Glover, a partner at law firm Simpson Thacher & Bartlett in London. He says the changes were put in place to appease investors but had not served the industry well.

He adds: “For example, a number of private equity managers were required to introduce a provision which allowed investors to cease providing industry committed capital to private equity managers, irrespective of underlying performance. That is now being removed from fundraising terms.”

In the case of CVC, the buyout group has received such strong demand that it is removing the early-bird discount, which is typically designed to entice investors to committing early to a fund by offering them cheaper fees.

Such discounts, usually 5 per cent of the management fee, were introduced after the financial crisis in efforts to lure jittery investors into funds.

CVC is also cutting the minimum return required before the manager begins to enjoy a share of the profits from 8 per cent, the industry standard, to 6 per cent, say people familiar with the plans.

Higher hurdle rates and restrictions on managers working on other investments were supposed to help encourage fund managers to outperform the public markets.

However, according to analysts, it is now managers who are calling the shots as “dry powder” — the phrase referring to cash reserves kept by buyout groups — reached record highs this year.

“Private equity firms have adopted a ‘if you don’t like it tough’ stance,” says one person familiar with the CVC fundraising.

Interest in private equity funds is in stark contrast to those in hedge funds, which were punished in June for their poor performance as investors pulled $20.7bn from the industry.

Hedge fund managers delivered returns of -0.95 per cent in the 12 months to the end of June 2016. By contrast, private equity groups in Europe returned 8.5 per cent during the same period, according to Preqin.

Despite less favourable terms, investors say they are still keen to hire proven managers. Peter Freire, chief executive of the Institutional Limited Partners Association, which represents institutional investors, says: “The simple way to think about that is this: would you rather give me your money to invest and I’d probably lose it all — even if I promise you a higher hurdle rate and no fees?

“Or would you rather give it to someone who knows what they are doing but they are going to charge more?”

However, Sebastien Canderle, private equity consultant and author of The Debt Trap, warned investors not to give in to all of managers’ demands.

“For GPs (managers) with a strong track record, there is nothing wrong with preferential treatment, such as a higher carry. But to best serve their investors’ interests, LPs (investors) should hold firm on the standard 8 per cent hurdle rate.”
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