THE shake-up at one of the country's biggest private equity groups, CVC Asia Pacific, is part of a global restructure after its parent, CVC Capital Partners, this week sought to raise cash by selling 10 per cent of its empire.
The Australian arm of CVC, which owns the debt-stricken Nine Entertainment Company spread across a number of private equity funds, will replace its high-profile managing partner Adrian MacKenzie and freeze any new investments in Australia.
BusinessDay can reveal that CVC Capital Partners Asia Pacific 2005 fund, which raised $1.975 billion seven years ago, has underperformed its rivals, ranking in the fourth quartile of all private equity funds operating in the local market.
The exit of Mr MacKenzie after 17 years at the firm comes amid broader pressure across the private equity industry, with some funds struggling to exit their investments at a profit after paying boom-time prices before the global financial crisis hit.
Confidential performance figures show at the end of December 2011 that investors in the flagship fund were getting negative returns. Every $1 invested in the fund mostly by superannuation funds was worth 66 cents, the figures show.
The CVC Capital Partners Asia Pacific fund 3, which raised $4.2 billion in 2008, is barely breaking even, with every dollar in the fund now valued $1.03, the figures show.
These funds are in sharp contrast to older investment, a $US750 million fund set up in 2000 that is returning a multiple of 2.21 times, or $2.21 for ever dollar invested.
Mr MacKenzie, who oversaw the purchase of Nine Entertainment in two tranches, has torched $1.9 billion worth of investor money. He also oversaw the roll-up of pathology groups into I-MED, which lost hundreds of millions of dollars, as well as the disastrous Stella Mantra Group.
CVC is expected to write off the entire $1.9 billion in Nine unless the restructure gives it a tiny carried interest. Goldman Sachs, which has an estimated $1 billion mezzanine debt, will be forced to write off a big chunk of its investment.
CVC co-founder and managing partner Rolly van Rappard insisted Mr MacKenzie decided to step down. "It has been Adrian's decision to leave and he will remain a friend of the firm," Mr van Rappard said.
The expected losses of investor funds in Australia come as the global CVC Group this week sold 10 per cent of itself to three sovereign wealth funds to expand into new areas of business at a time when private equity funds are struggling to raise money from investors.
Many private equity funds overpaid for assets, leveraged them to within an inch of their life, and are now sitting on some big lemons. Nine Entertainment is one of the bigger lemons.
For investors, most of which are super funds, it has caused a drag on their already challenged returns.
Once described as masters of the universe, private equity funds have faced scrutiny in the past few years as a string of IPOs have left a lot of shareholders drowning in losses.
These include Myer, which was sold by TPG in November 2009 at a listing price of $4.10 and last traded at $1.87. Pacific Brands listed in 2004 at $2.50 a share and last traded at 59 cents and the fast-food restaurant owner Collins Foods, which was floated by Pacific Equity Partners in August 2011 at $2.50 and soon after downgraded its prospectus forecasts. It closed yesterday at $1.13.
Superannuation funds are becoming more wary about investing in private equity. Still, the Future Fund remains a critical supporter, more than doubling its allocation to private equity over the past year to $4.9 billion.
There have also been a string of assets that were bought above market price and are now virtually worthless. Ironbridge paid heavily for CanWest Radio and Television in New Zealand, while private equity giant KKR's investment in Seven West has also taken a battering. Others include Warburg Pincus, way behind on its investment in Transpacific Industries.
In the past couple of years some companies owned by private equity funds collapsed, including Colorado, Angus & Robertson and Borders.
Mr MacKenzie's departure will put the focus on other private equity funds, which have a reputation for remunerating their people well. While some have performed well, with more good assets than bad, others have not and they will face increasing pressure from investors.
In a statement, he yesterday expressed confidence in CVC's ability to continue to manage the investments across its funds. "I leave a highly capable team in place which will continue to manage our investment portfolio in Australia, including Nine Entertainment," he said.
Frequently Asked Questions about this Article…
What triggered the shake-up at CVC Asia Pacific and what changes are being made?
CVC Asia Pacific is part of a global restructure after its parent, CVC Capital Partners, sold 10% of the group to three sovereign wealth funds to raise cash. The Australian arm is replacing long-time managing partner Adrian MacKenzie, has frozen new investments in Australia and is addressing underperforming funds in the region.
How have CVC's Australian private equity funds performed recently?
Confidential figures show the flagship CVC Asia Pacific 2005 fund has underperformed, ranking in the fourth quartile locally and returning negative results (every $1 invested was worth about 66 cents at December 2011). The 2008 fund is roughly breaking even (about $1.03 per $1 invested), while an older 2000 fund is returning about 2.21 times capital.
What does the CVC situation mean for everyday investors and superannuation funds?
Many investors in CVC funds are superannuation funds, and the poor returns have dragged on their performance. The article says super funds are becoming more wary about private equity exposure, though large investors like the Future Fund have even doubled allocations to private equity (to $4.9 billion).
What's the issue with Nine Entertainment and how could it affect investors?
CVC bought Nine Entertainment in two tranches and has effectively lost about $1.9 billion of investor capital on the deal. CVC is expected to write off the entire $1.9 billion unless restructuring gives it a small carried interest. Goldman Sachs, with about $1 billion in mezzanine debt, is also likely to write off a significant portion of its investment.
Have other private equity-backed IPOs and exits disappointed investors?
Yes. The article cites several examples where IPOs left shareholders with losses: Myer (listed at $4.10, later trading around $1.87), Pacific Brands (listed at $2.50, later 59 cents), and Collins Foods (floated at $2.50, later trading near $1.13). These cases illustrate broader exit and valuation problems for some private equity deals.
Why are private equity funds under increasing scrutiny right now?
The article explains many funds overpaid for assets during boom times, heavily leveraged acquisitions and now struggle to exit investments at a profit. Some assets bought above market price are now virtually worthless, and several portfolio companies have collapsed, prompting closer investor scrutiny of performance and fees.
Are there private equity funds that have performed well despite the recent problems?
Yes. The article notes older funds can still perform strongly—for example, a US$750 million fund set up in 2000 is returning about 2.21 times invested capital. It also notes that while some funds have many bad assets, others have more good assets than bad.
What practical takeaways should everyday investors consider from the CVC and broader private equity issues?
The CVC case highlights that private equity can carry significant valuation and exit risk: some funds have produced negative returns, large write-offs are possible (as with Nine), and super funds are becoming more cautious. At the same time, large institutional investors like the Future Fund remain active, showing the asset class still attracts support despite heightened scrutiny.
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