CVC bucks the downturn with fees up 24%

Revenues roll at private equity firm thanks to fund management success and limited presence in US
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The Independent Online

The private equity firm CVC, which has stakes in the AA and Debenhams, has posted record revenues for the year to March 2008 as its fund management fees increased by 24 per cent to€£228m.

The Luxembourg-based business, run by Leeds-born Michael Smith, managed to steer through the credit crisis by having limited exposure to the US market, where it has just one office. This compares to 12 in Europe and six in Asia. It had total turnover of £230.7m, and although operating costs were up 43 per cent to £181.7m, even this is a sign of its success.

A doubling of staff costs to £65m accounts for the bulk of this increase. However, the company only took on 17 per cent more employees, indicating that hefty bonuses were paid out. This isn't surprising as, during the financial year, CVC announced that its latest investment fund, the £6bn European Fund IV, had achieved a 52.9 per cent internal rate of return – another record result for the company.

The market value of the business is hard to gauge. Traditional investment companies change hands for about 2 per cent of the funds that are under their management, but buyout firms should be worth more because they generate higher returns. So CVC could be worth as much as 5 per cent of the £23.6bn in funds it manages. This would put a £1.18bn price tag on the company.

Were it to change hands, the biggest beneficiaries would be its chairman Mr Smith and co-founder Donald Mackenzie. They both directly own 9.75 per cent stakes, which would be worth £115m each.

Their biggest returns come from gains in the size of CVC's funds, which is known in the buyout industry as "carried interest".

The company's 140 staff are paid an average of £465,000, which sent its operating profits down by 26 per cent. Despite this, CVC still managed to pump up its bottom line.

As CVC's results began their meteoric rise, it banked £47m in 2007 alone, taking its balance to £108.7m. It is now reaping the rewards as its interest income hit £77.3m this financial year.

Even this isn't sitting idle, as CVC invested £50m of its own money in Fund IV during 2007. It also recently raised the biggest-ever fund in the Asia Pacific region with a commitment of £2.6bn, and in July this year an interim close was put on its £10bn European Fund V.

During the financial year, a complex shuffle saw its business move to a new investment structure in Luxembourg, which is still owned by CVC's nominees. This move led to CVC registering a€£1.05bn profit as an extraordinary item, but stripping it out of the net result yields an after- tax profit of £96m, up 72 per cent on the previous year.