According to some unconfirmed news reports, CVC Capital Partners is on track to close the biggest ever private equity buyout fund. The CVC Capital Partners IX is said to be likely to close at around 25 billion euros (US$27.35 billion). That would be an interesting figure at any time. It’s an especially interesting one in the light of challenges facing buyout investors in the new inflationary macro environment.
An internal memo in April from the investment division of New Jersey’s treasury department to the State Investment Council concerning a proposed investment of as much as 250 million euros in the fund has some interesting data points. According to the memo which is freely available online, the fund is proposing to pursue “leveraged buyouts of medium to large sized businesses across Europe and North America”, targeting 20%-30% gross internal rate of return, and two-to three times gross multiple on invested capital.
Although CVC VII from the 2018 vintage achieved 25.2% net IRR as of end-2022, CVC VIII from the 2021 vintage, and the immediate predecessor to CVC IX, achieved only 10.9% net IRR.
Of course, CVC VIII may still have to realise many of its investments. But still, its return figure compared to CVC IX’s target makes you wonder whether it’s just the consequence of the fund’s immaturity. Or is it a symptom of the falling average IRR often reported lately for the asset class? Some observers might also ask why CVC came back to the market within two years of CVC VIII’s closing.
Furthermore, according to the memo, CVC IX will pursue equity investments valued at between 250 million euros and 1.5 billion euros per transaction. Given the size of the fund, CVC had better hope that there’s an awful lot of attractive and reasonably priced companies in the right price range in Europe and North America.
Another document available online, from the Investment Advisory Council to the Minnesota State Board of Investment on May 15, includes a recommendation to invest up to $150 million in CVC IX.
News reports from South Korea in February tend to confirm the target figure for the fund. According to the reports, the National Pension Service and the Korean Teachers’ Credit Union are considering investing in the fund, and that it is expected to reach its final close around June 2023. Both institutions reportedly invested in CVC’s previous vehicles.
Clearly CVC Capital Partners hasn’t strayed too far from the staple limited partner constituency for big buyout funds. Will they be getting their money’s worth?
Coller Capital’s recent global private equity barometer found that only 11% of LPs polled expect mega-buyout investments to deliver good investment opportunities over the next couple of years. That is another interesting figure to set against the mega amount raised by CVC.
CVC IX is going to be an especially interesting fund to watch in terms of vintage performance in the years to come.
