Is Public PE Worth The Trouble?

Candover Investments PLC announced disastrous results this morning. The listed-company is a cornerstone investor in the Candover buyout funds.

Its current liquidity difficulties are causing pain to private equity firm Candover and highlighting the unattractiveness of the listed private equity vehicle model in an environment of scarce distributions.

Candover Investments PLC operates by committing capital to Candover buyout funds. Although it has credit lines, the primary source of this capital is from distributions returned to the investor from exits made by the buyout fund.

Candover Investments Plc committed €1 billion to Candover’s 2008 fund last year. However, the drop off in distributions combined with the fact its credit lines are now fully drawn means that it can no longer meet those commitments.

The model of the listed private equity investor relies on distributions. From 2005-7, these flowed in at a rate of between 32-35% of portfolio net asset value, but have now dropped down to one percent.

If the Candover 2008 buyout fund was to make a draw down request now, Candover Investments PLC would default on its commitment. The problem is hypothetical at the moment, since Candover’s buyout fund has not requested any cash for a deal.

In order to help its parent company, buyout firm Candover announced last week that it would be reducing the size of its 2008 fund. The fund has so far raised €3 billion and was initially targeting €5 billion.

This is a major blow for buyout firm Candover, founded 28 years ago and regarded as one of the pioneers of private equity investing in Europe.

The situation mirrors the difficulties experienced by SVG, a listed private equity investor focused on Permira funds.

Last year, SVG took Permira up on an offer to reduce its remaining commitments to Permira’s fourth fund. SVG has since launched a rights issue to raise additional cash.

The difference between the SVG and Candover Investment PLC predicaments, is that Permira’s fourth fund had already been fully raised and is much more invested than Candover’s 2008 fund.

“We remain convinced that there is significant longer term value in our funds and in Candover’s share of the carried interest in those funds,” Candover Investments Plc said in a statement.

Indeed, there might be, the hefty decline in valuations is likely transient and upon economic recovery, longer term value will return to investee companies.

Consequently, it is likely secondary private equity players will be sniffing around Candover Investments Plc.

The company’s share price has tumbled by 88% this year making it an attractive prospect for a secondary player which sees future value in Candover buyout fund’s portfolio companies.

The next few weeks will be telling for both buyout firm Candover and Candover Investments Plc.

The buyout firm will be in talks with other investors which have committed around €2 billion to its 2008 fund about that fund and what they want to do going forward.

For Candover Investments PLC, a creative solution may be sought, perhaps involving a secondary private equity player who will commit to a quiet work-out.

What is clear is that listed private equity investor vehicles might have provided permanent capital in the past, but their models look very shaky when distributions dry up.

This post originally appeared at Thomson Merger News