Revelations that one of the private equity masters of the universe, Adrian MacKenzie, will call it quits at the end of the year after watching CVC's equity investment in Nine Entertainment turn into a festering $1.9 billion hole, is little surprise.
CVC is a big global private equity player with a reputation that is being hurt by three Australian disasters that Mackenzie presided over. While he has had a few wins, the high profile disasters dwarf them. These include Nine, I-Med and Stella/Mantra Group, which was bought out of the collapsed MFS. While CVC still holds hope that it will get some money back it is an investment that hasn't been easy sailing.
The message from today's front page of the Australian Financial Review is that MacKenzie walks and that CVC is not planning to pump any more investments into Australia until it cleans up some of the messier investments and restores credibility.
CVC will write off the entire $1.9 billion in Nine unless the restructure gives them a tiny carried interest. Even Goldman Sachs, with around $1 billion mezzanine debt, will be forced to write off a big chunk of its investment.
While there are a lot of threats that Nine will be put into receivership, the reality of that happening is low given that it is hard to see who would benefit — apart from the receivers — from such a draconian move.
For now, the parties involved are looking at the Goldman Sachs proposal, which has the imprimatur of CVC. A resolution is expected to be found before D-day, which is February 13.
The problem is CVC isn't alone. Many private equity funds overpaid for assets, leveraged them to within an inch of their life, and are now sitting on some big lemons.
For investors, most of which are super funds, it means a drag on their already challenged returns. Private equity investors — again, many super funds — would be unimpressed with the impact this investment has had on their returns. Ironbridge is one of many that spring to mind. It paid heavily for CanWest Radio and Television in New Zealand. It would be interesting to see if there is much value left in its equity.
Private equity giant KKR's investment in Seven West has also been challenging.
Another private equity play is Warburg Pincus, which is still way behind on its investment in waste management group Transpacific Industries.
In the past couple of years some companies owned by private equity funds collapsed. These include Colorado, Angus & Robertson and Borders. The departure of MacKenzie will put the focus on other private equity funds, which have a reputation for remunerating their people well. While some funds have performed well and had more good assets than bad in their funds, others have not and it is these that will face increasing pressure from investors.