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CVC slashes hurdle rate to 6 pct on new $16 bln flagship fund

  • CVC’s seventh fund targeting 15 bln euros
  • Preferred return 6 pct, down from Fund VI’s 8 pct
  • “They’re being very aggressive,” says one LP

CVC Capital Partners slashed its latest flagship fund’s preferred return to 6 percent from the traditional 8 percent, according to three limited partners. The European buyout firm earlier this year officially launched its seventh flagship fund with a 15 billion euro ($16 billion) target.

The lower hurdle rate deviates from terms offered by the firm’s previous fund, a 10.9 billion euro vehicle that closed in 2013. CVC Capital Partners VI needs to deliver an 8 percent return to its investors before the firm and its professionals can collect carried interest, according to New Jersey State Investment Council documents.

Preferred returns, also known as hurdle rates, refer to the minimum return a fund manager must deliver to its investors before it can collect its share of the fund’s investment profits. By reducing its hurdle rate to 6 percent from 8 percent, CVC is lowering the threshold at which general partners can start collecting carried interest. Higher hurdle rates are generally considered to be friendlier to limited partners.

“They’re being very aggressive because they feel like they’re a top-tier GP,” said one LP who examined CVC VII’s terms. “I think some folks will draw the line, but there’s a tremendous amount of demand for that fund. So it won’t matter.”

CVC declined comment.

Dow Jones had reported in November that CVC planned to lower the hurdle rate.

CVC’s decision to reduce its hurdle rate is likely a function of investor demand, all three sources told Buyouts. Fund VI closed on its hard cap and was heavily oversubscribed. In 2013, New Jersey committed as much as $100 million to Fund VI and ultimately received an allocation of just over $85 million, according to state documents.

While Fund VI has yet to generate meaningful returns, its fifth flagship fund, which closed on 10.75 billion euros in 2008, had delivered a 12.7 percent internal rate of return and 1.63x multiple as of June 30, Oregon Public Employees Retirement Fund documents show. Fund IV, a 2005 flagship vehicle that raised 6 billion euros, had netted a 16.7 percent IRR and 1.94x multiple as of that date.

All three sources compared CVC’s decision to reduce its hurdle with that of Advent International, which eliminated the preferred return from its latest flagship fund’s term sheet. Advent closed its oversubscribed fund on its $13 billion hard cap despite changing its terms.

Roughly 79 percent of international buyout funds provide a hurdle of some kind, according to Buyouts’ most recent study of partnership terms. Some 77 percent of North American buyout funds provide LPs with a preferred return.

CVC was founded in 1981. The firm has raised more than $71 billion since its inception and operates across 23 locations throughout Europe, Asia and North and South America.

A Palestinian youth on Jan. 29, 2016, in the northern Gaza Strip jumps with a sword, demonstrating ninja-style skills. Youths have been receiving martial arts training at local clubs in Gaza for the past two years. They decided to form a team to hold regular shows, hoping that publicity will garner them invites to participate in international contests. Photo courtesy Reuters/Mohammed Salem