Why a European private equity giant wants to go public

Two scoops to start: First, private equity group TPG Capital has approached EY about buying a stake in its consulting arm in a deal that would herald a second attempt at breaking up the Big Four firm.

Next up, Apollo Global Management has shed its financial exposure to failed US trucking company Yellow, selling off a $500mn term loan and dropping plans to extend pricey financing to fund the freight group’s bankruptcy.

In today’s newsletter: 

• Why CVC decided to go public

• Private equity targets public healthcare

• China’s property crisis claims another victim

The logic behind CVC’s IPO

For the most ruthless and ambitious dealmakers, taking a job at CVC Capital Partners can be more lucrative than at its larger, publicly listed rivals such as Blackstone, KKR and Carlyle.

That’s because the fiercely secretive private equity firm’s unique profit-sharing model ensures that individual dealmakers retain a bigger share of money from successful investments, an “eat what you kill” model that has made its top performers very, very rich.

So how were the gatekeepers of one of Europe’s oldest private equity firms persuaded to follow in the footsteps of buyout shops such as TPG, Bridgepoint and EQT into the public markets, a move that could fundamentally alter its deal-centric mentality?

CVC’s revival of plans for a multibillion-euro stock market listing — which could come before the end of the year, people familiar with the matter told DD — would be the culmination of years of closed-door discussions over its fate.

The 700-person firm with €133bn in assets has found itself at a crossroads as the end of a golden age for private equity looms and its competitors have morphed into conglomerates of which buyouts are just one of various revenue streams.

One of its biggest motivations has been watching the evolution of Sweden’s EQT, which helped pioneer an IPO model that allows public investors to benefit from its management fees while still keeping most or all of the lucrative profits it makes buying and selling companies in private hands.

That’s a particularly attractive proposition for CVC.

Going public would also allow co-founders Donald Mackenzie, Rolly van Rappard and Steve Koltes to eventually cash out, as well as shareholders including the Hong Kong Monetary Authority, Kuwait Investment Authority, Singapore’s GIC and specialist finance firm Blue Owl.

The IPO will serve as an interesting experiment of whether private equity firms can still fetch as much as they did at the top of the cycle. CVC was valued at about €15bn when it agreed to sell a minority stake to Blue Owl’s Dyal Capital unit in 2021.

The firm, which recently raised €26bn for the largest private equity fund in history, has at least demonstrated its ability to raise cash in a tough market.

Private equity proposes a remedy for the NHS

The UK’s vaunted NHS is in crisis. A record 7.6mn people are waiting for treatment, as the taxpayer-funded service continues to battle staffing shortages and worker walkouts. 

Private equity firms think they can help find a cure. 

Over the past two and a half years, buyout groups have struck 150 deals for UK healthcare companies, many of which generate much of their income from providing services to the NHS. 

They are attracted to the sector because of the strong, recurring demand evidenced by the pressing need to cut the record treatment backlog.

“There is a nice recurring revenue profile and dependable demand that you can bet on and build your business case on,” Jasper van Heesch, a director at advisory firm RSM told DD’s Will Louch and the FT’s Sarah Neville and Gill Plimmer. 

Investors argue they can help run companies more efficiently, invest in better technology and deliver better services at a lower cost.

But the growing involvement of financial investors in a proudly public sector organisation is not without controversy. 

A recent paper published in the British Medical Journal found that healthcare provided by buyout-backed companies was often more expensive and had “mixed to harmful impacts on quality”.

Historically, the biggest risk of investing in a sector reliant on public sector funding is a changing of the political guard. But the UK’s two largest political parties have signalled that they’re in favour of using private providers to reduce NHS waiting lists.

“There is no major party advocating for a different model,” said Tom King, a director and political risk adviser for Lodestone Communications.

Country Garden: Paradise Lost

Last November, almost a year after the collapse of Evergrande shook global markets, Country Garden was supposed to be part of the solution for China’s troubled real estate sector.

With a new credit line from the state-backed Postal Savings Bank of China, the group was included among the ranks of safer developers that were supposed to restore order to an industry wracked by defaults and construction delays.

Now, China’s biggest private developer is on the cusp of falling victim to the same liquidity crisis. 

Late last month it walked away at the eleventh hour from a planned $300mn share sale being arranged by JPMorgan Chase (one of vanishingly few such deals in a market that until very recently had been lucrative for Wall Street banks, as DD’s Kaye Wiggins writes). 

Country Garden has missed bond payments on international debt, sparking a 30-day grace period, and on Friday disclosed expected losses of between Rmb45bn-55bn ($6.2bn-$7.6bn) in the first half of the year. 

On Monday, trading was halted in at least 10 of its onshore bonds. One bond, which had been close to par at the start of the year when optimism over China’s recovery from the coronavirus pandemic was high, has sunk to about 27 cents and matures next month.

The fate of the company is one of the biggest tests yet for Beijing, which has so far stopped short of bailing out failed developers. The government in 2020 launched a campaign to reduce leverage, which was designed to cool overheating home prices but also exacerbated funding woes across a business model where cash is rapidly recycled to develop new land.

Economic data on Tuesday painted a pessimistic picture for a sector where new construction starts are down a quarter in the year to July and prospective homeowners are increasingly opting for state-backed developers. 

Country Garden, which not long ago sold more properties than any other competitor in a Chinese market buoyed by historic waves of urbanisation, saw its sales slump 60 per cent. 

The crisis that began with Evergrande, meanwhile, shows few signs of abating.

Job moves

• Former Microsoft executive and Pendral Capital president Richard Emerson, who also held senior banking roles at Evercore and Lazard, is stepping down from the board of Apollo Global Management.

• Brevan Howard has hired Ares Management Corporation’s Oualid Lahsini to lead its Middle East business in Abu Dhabi. It also moved its head of compliance Ryan Taylor to the United Arab Emirates capital.

• Barclays has hired Moelis & Company’s Lee Counselman as a managing director focused on software deals in Boston.

• Credit Suisse’s former head of equity derivatives strategy Mandy Xu has joined Cboe Global Markets as vice-president and head of derivatives market intelligence.

• Law firm Weil, Gotshal & Manges has hired energy industry dealmaker Cody Carper as a partner in Houston. He joins from Skadden Arps.

Smart reads

Silicon Valley slump A string of bad bets has left Blackstone’s growth division struggling to raise cash, prompting chief Stephen Schwarzman to urge executives to get their act together, Bloomberg reports.

Streamflation The average cost of ad-free streaming is going up by nearly 25 per cent in about a year, according to a Wall Street Journal analysis, as entertainment giants try to squeeze more from consumers.

Lose-lose scenario Crypto exchange Binance looked poised to benefit from last year’s collapse of FTX but instead has been battling regulatory setbacks, the FT reports.

News round-up

Saudi Arabia and UAE race to buy Nvidia chips to power AI ambitions (FT)

Apollo to loan over $4bn to struggling buyout firms (Bloomberg) 

PayPal: M&A plans will be hampered by weak share price (Lex)

Russian court bans UBS, Credit Suisse from subsidiary disposals (Reuters) 

Departing L&G chief urges UK to ‘reverse’ trend of under-investment (FT)