Private equity giant CVC bets on going public

This is an audio transcript of the FT News Briefing podcast episode: ‘Private equity giant CVC bets on going public’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, October 19th. And this is your FT News Briefing.

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Netflix had a bounce back earnings report yesterday. And Russia has unleashed Iranian drones on Ukraine. Plus, Europe’s biggest private equity firm has long avoided the spotlight.

Kaye Wiggins
In fact, they actually appointed a law firm to send us a whole series of letters trying to stop us publishing some of the details.

Marc Filippino
The FT’s Kaye Wiggins reports on CVC Capital Partners and its plans to go public. I’m Marc Filippino and here’s the news you need to start your day.

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Netflix said it added almost two and a half million subscribers last quarter. The streaming service reported earnings yesterday and beat expectations both in subscribers and year-on-year revenue. The jump in subscribers is especially good news. Earlier this month, Netflix came out with its first subscriber loss in a decade. Netflix also warned that revenue and earnings would drop next quarter. Still, investors liked the earnings report they heard yesterday. The company’s share price jumped nearly 15 per cent in after-hours trading.

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Ukraine is considering breaking off relations with Iran. Kyiv is citing Russia’s use of Iranian drones to attack its energy infrastructure and also, quote, “terrorise the population”. The FT’s defence and security correspondent JP Rathbone has more on what Russia’s use of these cheap and effective drones say about the war.

John Paul Rathbone
Iran has been working on developing its park of drones and missiles for many years. In fact, it’s got the largest missile arsenal in the Middle East. And according to Western officials and Ukrainian officials, Russia has now been using some of these Iranian drones, in particular one called a Shahed 136 in Ukraine to good effect. The basic point of these drones is they’re slow and they fly low. So in theory, they’re easy to shoot down. But if you employ a lot of them, it only takes one to get through to hit its target.

Marc Filippino
Why is Russia using these drones now?

John Paul Rathbone
Well, some say that, in fact, Putin says that it was in retaliation for the Ukrainian bombing of the Kerch bridge, which is the bridge that links Crimea to Russia and is a key logistical supply point. But I think just as likely is that this is a plan to destroy Ukrainian civil and civilian infrastructure that Russia has had in its drawer for a long time. And the appointment by Putin of a new overall commander in, of the military operation in Ukraine is a general who is active in Syria, where he was responsible for the destruction and shelling of, of cities such as Aleppo. So it’s a familiar leaf taken out of the Russian playbook. It is also an indication that Russia has had to turn to a third country to supply its, or restock its, dwindling supply of precision-guided munitions and missiles. And British spy chief Jeremy Fleming, head of GCHQ, was very clear about that the other day. Last week he said how Russia’s invading forces were desperate and the generals were running out of munitions. And this is one sign of that. So it’s a sign of weakness that is also punishing for Ukraine.

Marc Filippino
John Paul Rathbone is the FT’s defence and security correspondent.

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Europe’s largest private equity firm is preparing to go public. CVC Capital Partners manages about €133bn in assets, including Spain’s football league La Liga, Formula One racing, Premiership Rugby and even PG Tips tea. Listing on the stock market would be a huge step for a private buyout firm that’s still very secretive.

Kaye Wiggins
The first thing that anyone will tell you about CVC is that, you know, these are people who do not like publicity.

Marc Filippino
That’s Kaye Wiggins. She’s our private capital correspondent and she’s been digging into the company as it prepares to hit the public market.

Kaye Wiggins
So there’s all sorts of like really well-known businesses that they either are currently invested in or have been in the past. But like I say, the company itself is largely a black box. So what I’ve been trying to do for the past few weeks and months is to kind of get inside that box.

Marc Filippino
How’d that go?

Kaye Wiggins
It wasn’t easy (laughter).

Marc Filippino
I can imagine.

Kaye Wiggins
Yeah (laughter). In fact, they actually appointed a law firm to send us a whole series of letters trying to stop us publishing some of the details that are actually printed in the story, which gave us a bit of an insight into, into the company.

Marc Filippino
Their rivals, their big ones are Blackstone, KKR. How does CVC compare to those guys?

Kaye Wiggins
I mean, number one is that those, those ones that you named are all listed. The other big difference, which is really quite fundamental, is the way that they pay their people. Most private equity firms like Blackstone, like KKR — if you’re a dealmaker, you are doing deals out of a fund and you are paid a share of the profits from that fund. And if you do, some of the fund’s good deals and someone else using the same fund or some bad deals, the whole thing kind of evens itself out. And everyone makes, makes money if the fund overall does well.

Marc Filippino
And Kaye, what about CVC?

Kaye Wiggins
You make money based on the deals that you are involved with, and you also can lose money based on the deals that you are involved with. So if you’re in a great deal that’s successful, you personally can make millions, even tens of millions of pounds. If you’re on a deal that goes badly wrong, what CVC can do is say, “Well, look. You need to repay us a share of that money because you’ve lost us money. And that’s, you know, that’s not acceptable. So every successful future deal that you do, a share of the profits you would have got from that is gonna be deducted until you’ve repaid how much you owe us from the deal that went wrong.” So you could lose, you could lose all of the money from your next deal. Even in a bad case in the next couple of deals that you do, because you’re paying back to the company for the stuff that went wrong.

Marc Filippino
It sounds pretty cut-throat and it sounds like it puts more emphasis on the individual than the company itself.

Kaye Wiggins
Yeah. I mean, essentially, it’s, it’s a collection of individual dealmakers. That’s the sort of what the company is. The way one of their investors described it to us was this is a “dog eat dog” world.

Marc Filippino
So you mentioned that unlike its competitors like Blackstone or KKR, CVC is not a publicly listed company, but it’s hoping to go public soon. How did CVC come to the conclusion that they wanna go public? I mean, secrecy is just a huge part of what they do.

Kaye Wiggins
It really is. Yeah. And I think they would have been putting these things on scales, right? So if you can imagine on one side of the scales, they’ve got, you know, “we’re going to have to be much more transparent. And there is a risk that we dilute the kind of very individualistic pay structure that’s fundamental to that business model”. So those are all the reasons on one side of the scales not to list. And on the other side they’ve got, “well, we need to grow. Our rivals, our smaller rivals are catching up to us, having listed and having, you know, brought in outside capital from that with which they can grow. We need to do that. And also our founders will be able to cash out one day if we list”. So from all of the conversations I’ve had, this was not by any means a quick or easy decision. This is something people have been talking about repeatedly for a long time before they’ve reached that conclusion.

Marc Filippino
But it’s not a particularly good time to go public in the sense that, you know, investors aren’t really looking to put their money into risky places. Is this poor timing on CVC’s part?

Kaye Wiggins
Yeah. I mean, you’re totally right to say this is not a good moment to list for any company, and particularly for a private equity firm. I don’t think CVC are imminently about to list — in fact, I think that’s extremely, extremely unlikely. I think that this will be something that happens next year, potentially towards the second half of next year, depending on all sorts of things. But it’s something that they are gearing up for. The beginning of this year, they had decided this is what they were going to do. And then obviously, you know, the invasion of Ukraine happens and with all of the consequent turmoil that has, has happened since then.

Marc Filippino
Kaye Wiggins is the FT’s private capital correspondent.

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Before we go, a quick follow-up on those export controls that the US imposed earlier this month. They banned the world’s chip equipment suppliers from selling American equipment to Chinese clients without permission. The FT’s reporting that Taiwan’s TSMC — that’s the biggest chip supplier in the world — recently secured a one-year licence from the US. It will allow TSMC to continue ordering American chipmaking gear for its manufacturing facility in China, where it’s planning to expand.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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