European buyout leader CVC Capital Partners has reportedly pulled its plans for an Amsterdam initial public offering. This is unsurprising following a string of sub-par performances after this autumn’s flotations finished with a disastrous 74% share slide by London Stock Exchange-listed CAB Payments following a warning on revenue levels.
Described as “another PR disaster for London’s stock market”, the debacle has further dimmed prospects for CVC’s flotation, and for listing exits for private equity-backed assets.
Further analysis suggests why CVC might have even been willing to test these murky public markets waters in the first place, though. Declaring that “the private equity reckoning has begun”, the Financial Times says the asset class and its major players may be about to meet the same fate that has hit public markets and leading names like Credit Suisse and Silicon Valley Bank.
“Danger lurks in every corner”, the FT warns, citing particularly high interest rates as the main challenge, as well as the trillions of dollars worth of unsold assets that the industry has accumulated and is now unable to exit. Its institutional investor base, meanwhile, already less bullish on the asset class now that bonds have restored some allure to more traditional allocations, is looking to get some of that money back before making further commitments.
An earlier FT had cited the collapse of Carlyle’s planned US$15 billion secondary buyout of healthcare software firm Cotiviti from Veritas Capital as symptomatic. Carlyle was unable to pull off the deal and no subsequent suitor has emerged, suggesting that even the leading buyout firms can no longer command the financial leverage they used to.
Furthermore, the report warned of increasingly unstable and risky instances of financial engineering on the balance sheets of private equity-held companies, quoting an alarming projection by Moody’s Investors Service that over half of the US companies in the single-B rating band and below will not be making enough money to both finance their debt and cover their capital expenditure by the end of this year. The result would likely be a wave of insolvencies, with the private equity owners yielding up their assets into the hands of the leverage providers.
No wonder private credit and distressed debt funds are the new flavour of the month. Moody’s has also warned that US university endowment funds, which tend to allocate heavily to private equity, are particularly vulnerable to credit risk from the asset class.
Meanwhile, according to other news reports, CVC may revisit listing plans once market conditions have improved.
I won’t be holding my breath. As I suggested a while ago, the firm may have planned to get as much value out of its platform before all those chickens came home to roost. Now it seems to have missed that opportunity, and will just have to ride out whatever downturn may await private equity, together with the rest of the industry.
