Candover reveals full extent of downturn

Candover Investments Plc has announced its final year results for 2008, revealing a sharp aggregated writedown of more than 50% in NAV following five successive years of increases.

In a statement that reflected the severe pressures being felt by firms at the larger end of the value spectrum - and therefore the sharp end of the current downturn - the group wrote off more than a third from the value of its portfolio, which has fallen from £483.6m in December 2007 to £310m. The bold cuts included several writedowns against investments made in the last 12 months, something that is not required under current fair value guidelines but which the report claimed was "necessary in the current climate".

Significantly, six of the firm's 22 interests were written down to zero. Included in this is Italian yacht manufacturer Ferretti, from which the firm publically walked away a week prior to the results announcement. Press reports claimed that the business is in the midst of restructuring negotiations that will include an equity injection from senior management. Candover released a statement announcing that it had "decided not to participate in the restructuring", as it "believes its existing stake in the business now has no value."

The investor acquired a 50.2% majority stake in Ferretti in a secondary buyout from Permira in December 2006 valued at around EUR1.7bn. The transaction was supported by a EUR960m debt package provided by Mediobanca and RBS. Permira, which retained a 10% stake in the business following the 2006 buyout, is expected to follow Candover's lead and write off its minority stake.

In addition, the group's investment in UK-laboratory testing services group Alcontrol, which was also reported as entering restructuring negotiations at the same time as Ferretti, was written down by close to 90%. Candover originally acquired Alcontrol at the end of 2004 in a secondary buyout from Bridgepoint valued at about EUR200m, with Dresdner Kleinwort Wasserstein and Bank of Scotland providing the debt.

That is not to say that the news was all bleak on the portfolio front, with 10 of the firm's investments showing an increase in value year-on-year. However, it is important to note that all bar one of these rises was due in the main to the fact that, as Euro-denominated investments, they benefited from the strength of the currency against Sterling over the year. Furthermore, four of these investments are actually interests in two private equity funds managed by French firm Ciclad and two mezzanine funds managed by ICG.

Candover announced net debt for 2008 of £64.9m, against a net cash balance of £117.8m in 2007. This was accounted for by cash outflow on investments (including the EUR1bn+ Expro and Technogym buyouts) of around £121.4m, as well as the fact that the Sterling value of the Euro- and Dollar-denominated debt was adversely affected by the aforementioned strong exchange rates.

The rub

As a consequence of the stark figures, Candover is instigating a strategic review of all operations and has already announced several measures that will take place in the coming months.

Firstly, the firm has announced that it is no longer in a position to commit any capital to its 2008 fund, which held a first close on EUR2.8bn in August 2008 and was targeting EUR5bn. The contribution from Candover Investments was to be EUR1bn. Discussions are currently ongoing with LPs in relation to a restructuring of the fund, which may include a temporary suspension of the investment period.

Secondly, and as has been anticipated since the fund downsizing was initially announced around two weeks ago, Candover will be making a series of redundancies across the business in an effort to reduce the cost base. In addition, the firm will no longer be able to finance investments in Asia and Eastern Europe, where it has been developing operations. The teams in these regions are said to be seeking to raise capital independently, otherwise they are to be closed.

Some broadsheets have even suggested that the planned staff cuts, which could see the number of investment staff falling from more than 50 to around 10, are to preclude a winding down of the firm, which was one of the pioneers of the private equity industry when it started more than 28 years ago.

Finally, there is to be no final year dividend, meaning the dividend for 2008 stands at just 22p per share (down from 60p in 2007).

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