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Aspiring Lawyers - Interviews & Vacation Schemes
Commercial Awareness Discussion
Commercial Awareness 2023/24 Thread
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<blockquote data-quote="Yash" data-source="post: 148839" data-attributes="member: 27791"><p>Thank you!</p><p></p><p><strong>1) </strong></p><p>Apologies, I made a typo here. I meant 'eat-what-you-kill'. Similar to how US law firms tend to remunerate partners, deal-makers at CVC enjoy a lot of upside for a successful exit. In a sense, they are remunerated meritocratically. However, this also applies where exits are unsuccessful; the deal-maker will have to cover the downside, and the loss is not shared across other deal-makers, as it would be in other PE firms with more of a profit-sharing model like Apollo Global. </p><p></p><p>For example, Nick Clarry was responsible for successful deals with Formula One and Samsonite, but much of the carried interest he enjoyed was needed to cover a part of the €400mn loss on a deal with Autobar.</p><p></p><p><strong>2)</strong></p><p>An eat-what-you-kill remuneration incentivises profitable deal-making, which is in LP's best interests. I.e., if a PE firm makes $1bn profit on an exit, approximately 80% of it would be enjoyed by LPs (assuming no hurdle rate). Out of the $200mn remaining, we can expect roughly 30% to go to the team responsible for the deal at CVC. If this percentage were lower, there would be less incentive to be profitable, as the reward for being profitable is diminished. </p><p></p><p>Hence, deal-makers are incentivised to be profitable through the opportunity to enjoy large percentages of carried interest. This will be attractive to LPs as they know the deal-makers will likely maximise profits and thus their returns.</p><p></p><p>There may be an argument that if deal-makers are to also cover large losses, it could result in risk-averse behaviour and hurt profits. However, this has not appeared to be the case at CVC. Rather, the CVC model forces dealmakers to fight to rescue the companies they have bought, meaning deals rarely lose money. This was the case with Samsonite, which, after 2008, CVC had written off €750mn of equity it had invested. Ultimately though, CVC made one-and-half times its money after restructuring the business and listing in Hong Kong in 2011.</p></blockquote><p></p>
[QUOTE="Yash, post: 148839, member: 27791"] Thank you! [B]1) [/B] Apologies, I made a typo here. I meant 'eat-what-you-kill'. Similar to how US law firms tend to remunerate partners, deal-makers at CVC enjoy a lot of upside for a successful exit. In a sense, they are remunerated meritocratically. However, this also applies where exits are unsuccessful; the deal-maker will have to cover the downside, and the loss is not shared across other deal-makers, as it would be in other PE firms with more of a profit-sharing model like Apollo Global. For example, Nick Clarry was responsible for successful deals with Formula One and Samsonite, but much of the carried interest he enjoyed was needed to cover a part of the €400mn loss on a deal with Autobar. [B]2)[/B] An eat-what-you-kill remuneration incentivises profitable deal-making, which is in LP's best interests. I.e., if a PE firm makes $1bn profit on an exit, approximately 80% of it would be enjoyed by LPs (assuming no hurdle rate). Out of the $200mn remaining, we can expect roughly 30% to go to the team responsible for the deal at CVC. If this percentage were lower, there would be less incentive to be profitable, as the reward for being profitable is diminished. Hence, deal-makers are incentivised to be profitable through the opportunity to enjoy large percentages of carried interest. This will be attractive to LPs as they know the deal-makers will likely maximise profits and thus their returns. There may be an argument that if deal-makers are to also cover large losses, it could result in risk-averse behaviour and hurt profits. However, this has not appeared to be the case at CVC. Rather, the CVC model forces dealmakers to fight to rescue the companies they have bought, meaning deals rarely lose money. This was the case with Samsonite, which, after 2008, CVC had written off €750mn of equity it had invested. Ultimately though, CVC made one-and-half times its money after restructuring the business and listing in Hong Kong in 2011. [/QUOTE]
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