Will private equity giant CVC thrive on public markets?

CVC Capital Partners (NL:CVC) closed out its late April debut on Euronext Amsterdam with the shares trading at €17.05 (£14.66), a 21 per cent premium to an admittedly undemanding guide price of €14 a share. The other side of the equation is that CVC was priced at a hefty discount to listed peers, most notably Sweden’s EQT AB (SE:EQT).

That initial gain over the offer price has been maintained for the most part, unsurprising given the extent of the oversubscription to the offer. But the early success of CVC doesn’t signal renewed appetite for public listings. Mainland Europe has seen a series of deals in recent months after two years of subdued activity, but “risk-off” sentiment still holds sway.

Discount or not, CVC’s public debut marks it as one of the best-performing European initial public offerings (IPOs) so far in 2024. But the listing was a long time in the making – CVC had baulked at an Amsterdam listing on two separate occasions due to unfavourable geopolitical developments, most recently the 7 October terrorist attacks on Israel.

However the imperative to go public has intensified in response to the trend towards consolidation in the private equity sector, giving rise to larger, more globally diversified companies. For buyout specialists, access to lower-cost capital has its attractions, but increased scale comes with wider risks. Industry analysts from EY caution that because of industry consolidation “the dynamics of investment, risk and reward are poised to undergo a profound transformation”, perhaps resulting in “less competition, higher fees and reduced choice for investors”. Within its listing prospectus, CVC notes that “leading private markets firms are gaining market share as investors increasingly seek to concentrate their assets with a smaller number of relationship firms”.

CVC now has a market cap of €17.3bn, and the listing should enable the private equity group to drive a substantial increase in its assets under management. Naturally, it will further enrich some of the company’s founders, but there are also benefits linked to succession planning. If the company’s partners plan to cash out, they will have to wait to do so, at least judging by the IPO documentation. It’s also worth noting that a significant proportion of the earnings derived from successful deals will effectively remain in private hands, split between deal teams and a separate private entity. CVC generated €1.09bn in aggregated revenue and €650mn in cash profits in 2023.

Although other private equity firms such as Blackstone (US:BX) and KKR & Co (US:KKR) have thrived on public markets, notwithstanding the early challenges posed by the global financial crisis, doubts still linger as to whether a deal-focused business model is compatible with the inherent regulatory constraints linked to a public quotation. The experience of its industry peers suggests that the doubts may be unwarranted. Ironically, however, industry consolidation is now being driven by heightened regulatory scrutiny of private equity, leading to increased compliance costs. Smaller firms are at a disadvantage in dealing with these costs, hence the pursuit of scale across the industry. Added to the regulatory burden, the risks of interest rates staying higher for longer have multiplied, so fundraising challenges are also increasingly to the fore. 

CVC counts the largest US pension funds within its blue-chip client base, along with 12 of the 15 most valuable sovereign wealth funds. Its average relationship with its top 50 clients stretches to 17 years, while around 82 per cent of the aggregate third-party commitments for each of Europe/Americas Funds VI through to Fund IX came from existing clients, so it’s a relatively stable affair. One of the other advantages of CVC’s public listing is that it provides its clients with greater flexibility in tailoring their capital allocations.

The group’s investments are broad-based, ranging from performing and private credit strategies to European infrastructure assets. The value-added equation takes on many forms, in some cases involving financial structuring and production expansion, through to the formation of the most viable exit strategies.

In addition to its regional staff, CVC has four dedicated sector teams covering technology, financial services, healthcare and sports, media and entertainment, yet its investment strategy does not generally focus on specific sectors. Perhaps part of the reason why the IPO attracted widespread media coverage was because of CVC’s investments in high-recognition brands such as Formula One, Premiership Rugby, Pro14, the Six Nations and Spain’s La Liga. Aside from the hype generated by the IPO, stock exchange administrators will be hoping its success might encourage CVC to take some of its maturing assets public in short order.