HKMA emerges as possible investor in ailing CVC Capital

The Hong Kong Monetary Authority has emerged as a possible investor in troubled CVC Capital Partners, which is said to have raised money by selling a 10% stake to a trio of investors including Singaporean and Kuwaiti sovereigns.

If true, it would mark a notable private equity investment by the HKMA, which had reserved $11 billion out of its $300 billion exchange fund for alternative investments in the year ending December 2011.

Additionally it brings into question the selection process by the authority’s Exchange Fund for alternative investments and the transparency of its investments in the asset class.  

CVC has had mixed fortunes in investments that span Asia-Pacific, Europe and the US. It is readying the launch its sixth buyout fund for Europe, while the head of its Australian unit quit last week amid expectations it will lose up to $1.8 billion from its buyout of Sydney-based Nine Entertainment Company.

The Government Investment Corporation of Singapore (GIC) and Kuwait Investment Authority (KIA) were identified by Australian media as two out of a trio of investors that had taken a combined 10% stake in the firm for an undisclosed sum.

The third investor has been described as an unidentified Asian fund, with sources naming the HKMA as a likely candidate; one notes that the authority has made a number of private equity fund investments over the years, but has been very secretive about the deals.

The HKMA did not confirm or deny it had taken a stake in CVC when approached by AsianInvestor, with a spokesperson saying: “It’s not our practice to comment on Exchange Fund’s investment strategy because of market sensitivity.”

CVC representatives could not be reached for comment.

The authority’s Hong Kong Exchange Fund, which manages the city’s foreign exchange reserves, is understood to have four subsidiaries that invest in property, private equity and emerging market securities.

Managed internally by HKMA staff, the subsidiaries returned $218 million to the exchange fund in 2010, although the authority does not publicly provide details on their portfolio holdings.

Exchange Fund, which is Hong Kong’s de facto sovereign fund, reportedly invested capital with KKR a few years ago. Bain Capital and Blackstone Group have also reportedly either had talks with or received investment from the HKMA.

HKMA first publicly announced its intention to invest in alternatives in 2010. However, it has been very guarded about its deals in the asset class. It contrasts with the more open approach taken by Singapore sovereigns Temasek Holdings and GIC.  

CVC’s sale of a 10% stake is seen as a money-raising exercise as the PE firm embarks on a restructuring plan. Its trouble spot is Australia, where its country head, Adrian MacKenzie, resigned amid speculation that portfolio company Nine would breach its debt covenants.

Should television network Nine fall into the ownership of its lenders, CVC would ignominiously suffer the biggest ever loss for a single buyout deal in Asia. It stands to lose up to $1.8 billion after buying the company for $5.6 billion in 2006, funded with more than $3 billion in debt.

The performance of CVC’s private equity funds has varied. Its first four European buyout funds were top-quartile performers, according to data from PE Hub. However, its Asia-Pacific funds II and III had respective net internal rates of return of -10.1% and 1.4% as of December 2011, as listed in a CalPERs fund performance review.

Despite CVC’s woes, an equity stake in the firm could prove attractive to sovereigns, given its strong record in European investing, according to an industry executive.

“Buying a stake in the management company could enable them to benefit from the long-term success of CVC, and potentially gain a great strategic partner to understand and invest in Europe directly in the future,” he said.