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Unquote
  • Funds

Cinven plays long game with financials fund in hunt for 3x returns

Luigi Sbrozzi of Cinven
Luigi Sbrozzi, Cinven
  • Pablo Mayo Cerqueiro
  • 19 July 2022
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Cinven seems happy to take the long way home if it means it can get LPs a 3x return on their money by leveraging its sector expertise.

Last week, the UK private equity announced the final close of its inaugural Strategic Financials Fund (SFF), a dedicated vehicle targeting deals across Europe’s financial services midmarket, from insurance and wealth management to asset-based specialty finance.

The close comes above target at EUR 1.5bn committed capital some two years after the fund was launched in the midst of the COVID-19 pandemic, Luigi Sbrozzi, partner and co-head of the strategy, told Unquote.

The fund has a life of 15 years – longer than its latest flagship fund – to allow time to build a financial services ecosystem and unlock higher returns, he said.

In contrast with other Cinven funds, insurance companies make up about a quarter of the SFF’s investor base, including two large undisclosed European insurers drawn to their home sector, Sbrozzi said.

Other LPs include sovereign wealth funds like Singapore’s GIC, North American pension funds such as British Columbia Investment Management Corporation (BCI) and university endowments, he added.

The fundraising efforts were led by Cinven’s own investor relations team, with support from investment bank Moelis & Co reaching out to new clients in the US, he said.

While Cinven is a seasoned owner of financial businesses, the growing ticket sizes of its flagship fund left an untapped opportunity in the higher midmarket that the SFF aims to exploit, Sbrozzi said.

Excluding bolt-on acquisitions, the fund expects to make six to 10 standalone investments between EUR 150m and EUR 400m in size, he said. With leverage, the enterprise value of targets can go up to EUR 600m or EUR 700m, he added.

The fund has already made three acquisitions since March last year, namely insurance middleman Miller, a subsidiary of Willis Towers Watson, in partnership with GIC; Compre, a consolidator of non-life insurance liabilities, with co-investment from BCI; and International Financial Group Limited (IFGL), a life insurer offering long-term savings products.

Specialised competition
There are few competitors with dedicated strategies operating in the same segment of the market as the SFF, Sbrozzi said. For example, financials-focused sponsor Pollen Street Capital typically favours tickets between GBP 70m and GBP 150m, managing partner Lindsey McMurray previously told Unquote.

Competition may wane further over the next 18 months for complex assets, Sbrozzi indicated, expressing confidence that the SFF can navigate a worsening economic outlook and secure external financing if needed.

Despite its concentrated portfolio, the fund is predicated on asymmetric risk, with downside protection built into the business models of its portfolio investments, Sbrozzi said. Asymmetric risk refers to investments that have greater upside potential than downside risk.

Moreover, certain deals might not admit leverage if the target is regulated, he said, noting that last year’s acquisition of Compre was financed entirely with equity. Compre is subject to the Solvency II regulatory regime governing insurance capital.

The SFF is interested in companies with predictable revenues and strong cash generation, such as insurance intermediaries, B2B services to financial institutions including claims management and software, as well as secured lending propositions in areas like mortgages, for instance, Sbrozzi said. Fund services providers are also in scope, though deals would be smaller than Sanne Group, he added.

Cinven tabled a series of indicative offers for Sanne last year but was ultimately outbid by sponsor-backed fund administrator Apex Group, as reported. Apex’s offer values Sanne’s equity at roughly GBP 1.5bn.

Meanwhile, the SFF is more cautious about so-called flow businesses that are dependent on volumes such as cash loans, consumer finance and FX, Sbrozzi added.

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