Candover story: Media picture lacks clarity

Emanuel Eftimiu
02 September 2010

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The announcement by Candover Investments plc that it is abandoning new investments to focus on returning cash from the sale of its remaining portfolio assets has certainly grabbed many headlines in recent days. But is the mainstream press sensationalising these events? And are there implications for the private equity industry itself? Emanuel Eftimiu investigates

As one of the biggest private equity names in Europe, it is little wonder that the mainstream media is quick to jump on the story and to draw parallels between the fortunes of the group and the wider industry. After all, Candover's struggles since the financial downturn can be easily labelled as the downfall of another private equity house that bet big at the top of the market and lost. As usual though, the reality is much more complex.

To begin with, there seems to be a slight confusion when it comes to Candover's structure. On the one hand there is the GP Candover Partners, which has raised and managed ten buyout funds since 1984. On the other hand there is the investment trust Candover Investments plc that wholly owns the GP and listed on the London Stock Exchange in 1984 in order to provide early financial backers of Candover with an exit route. Since then, the trust has on average committed 14% of the total size of each fund raised by Candover Partners.

Therefore, although Candover Investments has no influence on the investment or divestment decisions of the GP, the fortunes of both entities are inextricably linked. As long as the GP was achieving exceptional returns on its portfolio investments, the trust prospered. As of 31 December 2007, the compound annual growth rate of the net asset value of Candover Investments stood at 22% over five years and 14% over ten years. The well-documented events of 2008 followed, causing a meltdown in the financial markets and sending the global economy on a downward spiral.

In the wake of the crash, Candover, like many other private equity houses, was hit hard as a number of its portfolio businesses unravelled in the dramatically altered trading conditions. While the GP would be able to take the financial hit of writing off its equity stake in companies such as Italian luxury yacht maker Ferretti and UK betting group Gala Coral, the consequences for the investment trust were severe.

The rapid fall in the value of the trust's assets, i.e. investments in Candover Partners funds, combined with a lack of realisations by those funds, meant that Candover Investments was facing a liquidity crisis to fund its ongoing operations and meet its commitments to invest new capital alongside the vehicles. Additionally, the change in the capital structure of the trust in 2006, when £100m of cash was returned to shareholders and the subsequent issuance of a £200m bond to increase the trust's available capital to commit to future funds, aggravated the situation.

In hindsight, it is clear that the timing of these decisions will have had an important impact on the trust, as its weakened financial position and pressure on its bond covenants meant it could not maintain its €1bn commitment to the €5bn Candover 2008 Fund. The ensuing media uproar was substantial when the Candover 2008 Fund suspended its investment period in early 2009 while restructuring talks with LPs were underway. A final agreement to terminate the investment period was reached earlier this year making Expro, the UK oil services provider the fund's sole investment. For Candover Partners, the focus of the newly-trimmed down team switched entirely to maximising the value of the existing portfolio, including investments from the 2001 and 2005 funds.

Prior to the announcement this week, Candover Investments had considered its options, including a sale to an institutional investor, widely reported to have been Canadian group Alberta Investment Management Corporation. In the end, and maybe not surprisingly, the trust is following the GP's lead and has decided to optimise value for shareholders by remaining listed and returning cash to investors over time as portfolio realisations are made by Candover Partners.

What is more, although some media coverage suggests a sudden end to the listed trust, one should note that the realisation period of the 2005 fund, which carries the bulk of remaining investments, runs until 2015. In the end of course the outcome is going to be the same: the demise of one of the biggest names in European private equity.

But does this, as much of the media attention seems to indicate, have cataclysmic ramifications for the whole of the private equity industry? Not in our opinion. What it does suggest is that the investment model adopted by Candover Investments plc since 1984 was fundamentally flawed. After all, this is a model that involves a listed vehicle with its mark-to-market requirements placing all its bets on a single private equity house and its illiquid investments, while all the time having no control over the timing of investments and realisations.

The success of private equity GPs on the other hand should, as usual, be judged at the end of fund lifetimes. Those that will have managed to generate decent returns despite the economic downturn will go on to raise another fund, while those that haven't will fall by the wayside.

Therefore, while the trust has run its course, the future for Candover Partners and its remaining team members, will depend on how much value it will be able to generate from the existing portfolio.