CVC Seeks to Join Apollo, KKR in Underwriting Buyout Debt

Private equity firm CVC Capital Partners is ramping up its capital markets business to start underwriting debt used to fund buyouts.

(Bloomberg) — Private equity firm CVC Capital Partners is ramping up its capital markets business to start underwriting debt used to fund buyouts.

CVC, a global alternative investment specialist with €133 billion ($143 billion) of assets under management, is awaiting regulatory approval to pursue the strategy in both the US and Europe, according to people familiar with the matter who spoke on condition on anonymity. CVC is likely to start off by underwriting its own deals, the people said. 

A representative for CVC declined to comment.

The move would align it with a growing roster of firms that already finance their own deals by providing and selling a share of the debt, including KKR, Apollo, Blackstone, Carlyle and EQT. The aim is to underwrite a portion of debt financing buyout deals, alongside leading banks, and in doing so benefit from some of the most lucrative fees on offer in investment banking. 

The concept is a natural extension for many private equity shops that now house a swath of ex-bankers, with expertise in leverage finance. Many of these employees already offer their firms advice on whether to fund buyouts with private credit or bank debt, how to structure such deals, and who might be interested in buying. 

Still, it’s a delicate balance. Private equity firms need to maintain a good relationship with lenders — their partners in leveraged finance deals — so they want to avoid looking like they are cannibalizing banks’ fees. That’s particularly true after global central banks started their aggressive rate-hike cycles, depressing deal volumes as investors shied away from risk.

Deal Fees

In the case of a private credit transaction, some private equity firms will run a tender process and take an advisory fee, typically of around 50 to 100 basis points, for arranging a deal — as opposed to paying a third party bank or adviser to do this. On syndicated transactions, the capital markets desks can provide a portion of the debt alongside banks and receive an underwriting fee of around 2%. 

KKR Capital Markets, which has been doing this since 2007 in the US and 2008 in Europe, is by far the biggest, earning around $850 million in capital markets revenues in 2021 and $600 million in 2022 globally, one of the people said. The firm arranges financing not just for its own deals but those of other private equity firms, most recently on Affidea’s €150 million add-on transaction.

Carlyle, meanwhile, can underwrite its own deals and in certain circumstances other firms’ as well. 

“As the market has moved more towards private debt placement it makes sense for firms to be building up their capital market teams,” said Brian Lindley, head of Carlyle’s Global Capital Markets group. “As the complexity of arranging deals increases so does the benefit of being active in placing your own deals.”

EQT started building up its underwriting business around 2021 and can handle up to 10% of its own deals, the people added. Blackstone, meanwhile, has been doing it for longer and was recently a co-manager on a €700 million bond refinancing for Merlin Entertainments. Carlyle and EQT declined to comment, and Blackstone didn’t immediately respond to a request to comment.

Apollo, which has been in the business for a while but ramped up in 2021, recently participated in a €1.1 billion debt offering for Lottomatica, the people said. An Apollo spokesperson said that its investments in its capital markets platform has benefited its private equity business by boosting companies’ access to financing at a time when access to capital is limited.

Show of Faith

The underwriting business is particularly attractive for listed private equity firms to do this as they tend to be bigger. That gives them the influence they need with banks and investors to be able to shape a deal. They also have a fiduciary responsibility to shareholders to make sure they are charging for their in-house expertise, while fee generation additionally drives share price. 

Taking a portion of an underwrite can be attractive in the current climate as a show of faith in a deal on both the equity and debt side. It also demonstrates to banks that private equity firms are willing to have skin in the game, after banks lost billions of dollars in hung underwrites in the choppy market conditions whipped up by sharp rises in interest rates and Russia’s invasion of Ukraine. 

The capital-market desks can also leverage their relationships with investors and future access to deals in order to entice them into current financings, a particularly useful tool if a deal is struggling.

(Adds quote from Brian Lindley in tenth paragraph)

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