16 August 2023 CVC mooting IPO launch (again)

CVC mooting IPO launch (again)​

What do you need to know this week?

Private equity giant CVC Capital Partners is rumoured to be revisiting its ambitions to offer up to 10% of its shares to the public via an IPO.

CVC owns a diverse portfolio of brands ranging from tea conglomerate ekaterra to insurance company Fidelis Insurance. It is one of the largest PE houses in the world, with more than €90bn in assets under management.

It had previously flirted with an IPO but abandoned the plan last year due to market volatility, which has sent the volume of PE deals plummeting.

A distinguishing feature of the IPO currently being mooted is that private equity fund managers, which refers to the senior investment professionals responsible for fundraising and sourcing investment opportunities, will retain full rights over any carried interest accruing in the fund.

Instead, the predominant source of profit available to public shareholders will be from the management fees CVC generates from the funds under management.

Why is this important for your interviews?

CVC’s decision to reconsider an IPO indicates the group’s confidence in its future performance despite the fact that the PE market has not rebounded in recent months. This in itself is an interesting topic of conversation if you are keen on private equity law.

However, this development also invites us to reflect upon how PE funds are structured and how their structure enables fund managers to generate substantial profits.

The principle of carried interest is that it rewards the investment professionals which manage the fund for generating strong returns.

Remember, private equity usually operates by raising large sums of money from multiple investment partners called limited partners (LPs). These LPs contribute a portion to the total funds raised, with the PE fund (i.e., CVC) also typically contributing a sum.

However, it is the PE house (CVC) that determines how the capital is invested; not the LPs. That is, the PE fund managers choose which private companies to acquire. To generate a return on the capital requires the PE house to select for opportunities with the ability to generate returns over the life cycle of the investment, which is usually for five or more years.

This money will be locked away for the life of the fund. At the end of the fund’s life, the initial capital invested by each LP will be returned to them, minus any losses or plus any profit.

Where there is carried interest, a portion of that profit will go to the investment professionals directly. This is in addition to any management fees. The traditional PE fee structure was “two and twenty”, referring to 2% charged in management fees plus 20% of any profits. As PE funds have sought to thrive in a more competitive environment, “one and ten” (1% fees, 10% profits) has become more common.

Below is an example of how this plays out in practice:



In this simplified case, CVC would generate $50m in fees, and the fund managers would be entitled to $25m.

Under CVC’s mooted IPO, public shareholders would not have any claim over the performance fees. Instead, they would receive a portion of the management fees, which would presumably be paid out as dividends.

How is this topic relevant to law firms?

The prospect of CVC’s IPO is a fascinating one from the perspective of a law firm with experience advising private equity groups and other financial sponsors. The IPO itself will require the advice of corporate and equity capital markets groups, as well as private funds. There will also be regulatory aspects to the deal that will engage financial regulatory practice groups.