Toxic and top-quartile

Happy Sunday.

CVC Capital Partners may finally be closing in on a long-awaited IPO as news broke this week that an offering could come as early as November.

Dusting Off Old Plans

The Luxembourg-based firm came close to an offering last year, but pulled the plug after Russia invaded Ukraine and markets seized up.

Since then, CVC has pushed further into new asset classes and raised the largest-ever buyout fund, an impressive $28 billion haul in the midst of a challenging fundraising environment.

Now, as markets rebound, the group is working with Goldman Sachs, JPMorgan, and Morgan Stanley to prepare for an Amsterdam listing that will look to build on a $15 billion valuation set in the 2021 sale of a minority stake to Blue Owl.

CVC’s offering follows a number of other private equity listings in recent years, though comes at a time when investors are grappling with a decidedly less attractive buyout environment. Tepid deal flow, expensive financing, and retrenched exit valuations have driven disappointing market performance among peers — Bridgepoint has fallen nearly 50% since the start of 2022.

Hands Off the Carry

CVC’s path to a public offering was in part prompted by European rival EQT. The Swedish firm listed in 2019 with a unique structure that handed investors a stake in its management fees without giving up any of its carried interest, or share of investment profits.

While shareholders share in a smaller pie when carried interest is excluded, they assign more value to recurring and predictable management fees. That’s handed EQT the industry’s richest valuation and prompted other firms to consider the novel approach.

A Meritocracy or Toxic Environment?

The shift to carried interest retention holds more importance for CVC than peers thanks to the group’s adoption of a unique compensation model.

Most private equity firms allocate carried interest to their investment professionals at the fund level, meaning their personal upside is dependent on the performance of a broad basket of deals.

CVC instead operates with a deal-by-deal carry model, one of the few large-cap funds to do so. In this approach, professionals’ performance-based compensation is tied only to the deals that they execute.

Even within specific deal teams, the firm has the power to realign allocations to different investors. Rather than a guaranteed lion’s share for the most senior employee, a junior investor could take home the biggest slice if they sourced a deal or otherwise had an outsize execution impact.

CVC’s strong returns history has proven out the model, though insiders say it’s also contributed to a uniquely aggressive culture within the firm. Former employees describe a cutthroat environment with an “eat what you kill” mentality as investors fight to land in coveted deal teams.

But, while deal-specific carry can hand professionals outsize windfalls, it also works in the opposite direction. Loss-making deal teams are hit with ‘negative carry,’ requiring them to dig their way out of a compensation hole with future successes before they see another distribution.

While unpleasant for professionals forced to take a negative hit, CVC’s industry-leading 1% loss ratio does, again, support the framework.

Use of Proceeds

CVC has adopted a similar growth strategy to peers like Blackstone and Apollo, opting to build a diversified asset management platform reaching far beyond its traditional buyout roots.

It makes sense — there are only so many attractive LBO candidates available, and a growing number of firms competing for the same assets will naturally cap both returns and future growth.

To shareholders, that future growth is critical. Publicly traded managers feel intense pressure to grow assets under management as investors demand growth in the management fee pool.

That pressure is likely to be felt more acutely for CVC than its peers given its carried interest retention.

The firm has already been hard at work building its asset base and fee pool — since canceling its original IPO, CVC acquired private equity secondaries investor Glendower Capital and picked up infrastructure investor DIF Capital Partners.

Looking to the future, CVC management has already said they plan to leverage IPO proceeds to finance further acquisitions, including a deeper expansion into infrastructure and real estate. Next on the roadmap could be a Blackstone-esque move into the large (and lucrative) retail market.

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 DEALS, DEALS, DEALS

1. New Mountain and Marlin agree on a portfolio company tie-up.

• The sponsors announced a plan to merge New Mountain-backed HealthComp and Marlin-backed Virgin Pulse, attempting to create an end-to-end employer-sponsored health plan platform.

• The official line is that the combination will create the first "health platform-as-a-service" organization, providing a unique angle to solve health plan incentive misalignment that can reign in rising costs. But, the deal may actually be more about finding a creative exit strategy in a difficult environment.

• New Mountain will hold a majority stake in the combined business, valued at around $3 billion, while Marlin will roll over a portion of its Virgin Pulse stake to retain a minority position. Blackstone and Morgan Health, JP Morgan's healthcare investment unit, are also coming into the deal with minority stakes of their own.

• That Marlin stake might not be worth very much. The sponsor levered up to 9.0x pro forma earnings in a 2021 dividend recap, with the debt trading at a discount prior to this announcement.

• Blackstone’s private credit arm is providing debt financing, effectively refinancing itself after separately lending to both HealthComp and Virgin Pulse. There’s also a lot going on in the go-forward capital structure: the stack includes rollover from existing sponsor equity stakes, a new equity injection, junior preferred equity, senior secured notes, and a strip of HoldCo notes.

2. Cinven brings Synlab back in-house.

• After submitting an initial bid in March, Cinven has now reached an agreement to acquire the 57.2% stake it doesn’t own in diagnostics testing provider Synlab for €1.3 billion.

• The move comes two years after the former Cinven portfolio company went public. Since then, a worse-than-expected loss of Covid-related revenue has driven a more than two-thirds decline in market value.

• The deal’s €2.2 billion valuation isn’t a fair long-term mark, according to the Board, but, they say, offers short-term investors an off-ramp. While it’s nowhere near the €5.5 billion IPO valuation, it is a 42% premium to Synlab’s price prior to Cinven’s approach.

• For Cinven, it’s another bite at the apple in a deal that was probably a decent outcome even with poor post-IPO performance. The sponsor sold down part of its holding at the €18 per share IPO price and then executed a block sale at €22.15 per share. Now, it’s coming back in at a substantially lower multiple and will hope to build on a stable non-Covid business.

• Post-acquisition, Cinven’s number one priority will be margin expansion. While base business revenue has grown, Synlab has been pressured by labor inflation that’s outpaced reimbursement rates.

3. Thoma Bravo exits Exostar in sale to Arlington.

• Arlington Capital Partners agreed to acquire secure communications firm Exostar from Thoma Bravo. Terms remain undisclosed, though the transaction is expected to close by year-end.

• It's a relatively quick turnaround from Thoma Bravo's mid-2020 acquisition of Exostar, pegged at around $100 million by the Wall Street Journal. A definitive read on outcome is difficult absent deal information, though Exostar's client count grew more than 30% over the hold.

• The deal fits squarely within Arlington's "regulated industries" mandate and comes shortly after Arlington's formation of Eqlipse Technologies, a combination of five cybersecurity companies that sells into government agencies. While Exostar's corporate end market (and separate Arlington deal team) make it less likely to slot into the Eqlipse organization, it's clear that Arlington continues to see runway in its cybersecurity thesis.

The rest of the deal sheet…

• Apax Partners and GTCR are exploring an IPO or sale process for AssuredPartners, an insurance broker that could be valued at up to $16 billion.

• Genstar is seeking a buyer for TekniPlex, a maker of health care and consumer products that could fetch more than $4 billion.

• PAI Partners is exploring a sale of Apleona Group that could value the facilities manager at around €4 billion.

• British Columbia Investment Management Corp. is considering a sale of Hayfin, a private credit firm with around €30 billion in AUM.

• Bain Capital is considering a takeover bid for CCC Intelligent Solutions, an auto insurance software provider controlled by Advent International.

• Platinum Equity agreed to acquire Cook & Boardman, a commercial door distributor, from Littlejohn & Co.

• Rosen Group, a maker of energy pipeline testing equipment, is set to receive final bids from Brookfield, Goldman Sachs, Partners Group, and T.H. Lee in a deal that could be valued at around $4 billion.

• Onex is considering a full or partial sale of trade show organizer Emerald.

• Wind Point Partners hired William Blair and BMO to find a buyer for Gehl Foods, a dairy products maker that could fetch over $600 million.

• Alfasigma agreed to buy Intercept Pharmaceuticals, a drugmaker focused on liver diseases, for $794 million.

• Chesapeake Utilities agreed to buy Florida City Gas for $923 million.

• Zeus Co., a family-owned maker of medical equipment components, is exploring a sale that could fetch at least $4 billion.

• The XFL, backed by RedBird Capital Partners, announced an agreement to merge with rival football league the USFL.

• HGGC is seeking a buyer for Monotype Imaging, a typeface firm that could fetch more than $4 billion.

• NXC Corp. is seeking a buyer for Stokke, a maker of baby and kid products, in a deal that could be valued at around $1 billion.

• Thyssenkrupp is in advanced talks to sell up to 50% of its steel business to Czech billionaire Daniel Křetínský.

• Sycamore Partners agreed to buy apparel retailer Chico's FAS for $1 billion.

• Palo Alto Networks is in talks to buy Talon Cyber Security for around $700 million.

• AGCO will pay $2 billion to acquire certain ag-tech assets of Trimble.

• Citigroup is in talks to sell its China onshore retail wealth unit to HSBC.

• Pros Holdings hired Qatalyst Partners to find a buyer, sending the company's market cap up to around $1.7 billion.

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