The Europe-based buyout firm, which has started discussions with investors ahead of launching a fundraising for about €12.5 billion, is planning to have a ‘hurdle rate’ of 6% compared with industry standard of 8%, according to one investor.
This will mean the firm starts receiving a portion of the profits – typically 20% – at an earlier point than usual should the fund prove profitable. This would also mean investors receive slightly less than under the old system overall.
A spokesman for CVC declined to comment.
CVC is not the only firm skewing terms in its favour amid strong demand for access to the best funds. Boston-based Advent International, one of CVC’s rivals, removed the hurdle rate from its latest fund which closed on $ 13 billion in March.
One investor said that CVC already had demand for the new fund that was “north of €20 billion” and added that CVC would be able to dictate the terms because the firm was so popular with investors.
Speaking at the British Private Equity and Venture Capital Association’s annual conference on October 6, Marc St John, a partner and head of investor relations at CVC Capital Partners, called the large amounts of capital that investors are trying to house with private equity funds “scary”.
He said: “I met people who put $ 150 million in our last fund who will want to put in $ 500 million. Or people who I have never even [met who say] we want to put $ 500 million in your fund,” he said.
Some market executives believe 8% is too high for a hurdle rate. One investor said the figure became the industry standard during an economic environment when inflation and interest rates were around 8%. The idea was that if investors were putting their money in a buyout fund, it would have to outperform inflation and interest rates. However, interest rates have been at historic lows following the financial crisis and a number of firms have warned that private equity returns will drop.
During an earnings call on July 27, Carlyle Group co-founders William Conway and David Rubenstein said that soaring stock markets and heated competition for deals would make it harder for buyout firms to produce big profits on investments in the foreseeable future.
Referring to the returns that top private equity funds historically produced, Conway said: “Right now, it is tough to earn returns of 20% or more in the private equity business.” Rubenstein added that investors are “willing to take lower rates of return than the kinds that we’ve averaged over our history”.