Poor returns dog CVC funds

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.