CVC's finances get ever murkier


Formula One's finances are hardly transparent. Both the company which sells F1's trackside advertising and the company which ultimately owns the commercial rights to the sport are based in Jersey consequently, they don't need to file public accounts. The sport's owner, private equity firm CVC, has been an exception to this as the results of its financial management business were lodged every year by its head office in Luxembourg. Until now.

According to a recent report in the Sunday Telegraph by Pitpass' business editor Chris Sylt, CVC has taken steps to reduce transparency in its own finances. In March 2008 CVC set up a new holding company to take advantage of a change in Luxembourg's legislation which allows it to avoid filing consolidated accounts. In short, it is now not obliged to publicly file one document showing the total revenue and profit from all its subsidiary companies.

We aren't talking here about the companies which CVC invests in, like F1, the AA and Debenhams, but instead the companies which CVC owns to run its business of investing other people's money. Since many of CVC's subsidiaries don't file accounts, due to being based offshore, it is no longer possible to get an accurate picture of how well it is doing. In itself, this could save CVC from some embarrassment as it is believed to have been battered by the economic downturn.

The financial nitty-gritty, according to Sylt, is that CVC is now incorporated as a specialised investment fund and this also exempts it from corporate income tax, business tax and net wealth tax. It is likely to give a significant saving. The bulk of CVC's revenue comes from fees levied on the management of its funds which are worth 30.4bn (€34.3bn). In its last set of consolidated accounts to 31 March 2008 CVC reported record fee revenues of 202.8m (€228.2m) but, since then its Asian investments have been particularly badly hit.

In 2008 CVC failed to sell the Singapore metal stamping company Amtek Engineering and shoe repair company Minit Asia Pacific which it had put on the market. CVC suffered further disappointment in 2009 when its stake in Japanese restaurant chain Skylark was seized by lenders in August after it failed to repay a loan. However, perhaps the biggest blow came just one month later when CVC lost its grip on one of its highest profile investments as luggage maker Samsonite filed for Chapter 11 bankruptcy.

CVC paid 1bn (€1.1bn) for Samsonite - the same amount that it shelled out for F1's commercial rightsholder. Worryingly, industry commentators have concluded that an expansion plan for Samsonite put in place by CVC led to the bankruptcy. The parallel with F1 is uncanny as the sport has expanded into new countries since CVC bought it in 2005 and this season will see the highest number of races on the calendar since the acquisition.

The only indication of CVC's performance comes from its unconsolidated accounts to 31 December 2008 which reveal the change of holding company. The director's report in the accounts says that "in the period, the fund's investments have traded profitably and as forecasted despite the impact of the downturn in market conditions as a result of the turmoil in global credit markets."

However, Sylt was not deterred by the stonewall from CVC's accounts and managed to get data about CVC's performance from another source. It doesn't look rosy.

Pension funds are the biggest single type of investors in the funds with which CVC acquires companies. So, for example, public and corporate pension funds provided 45% of CVC's 5.3bn (€6bn) Fund IV which was used to buy F1. The reason for this is that pension funds want to invest in something which will give a high return in order for their pension holders to have as much money as possible to draw on in future. Private equity companies should theoretically give good returns since they are specialised at acquiring companies and maximising value from them but this isn't always the case as shown by the stark example of Samsonite. It is also born out in the data which Sylt discovered.

The data comes from CalPERS, the largest pension fund in the US, and it shows that it has made heavy losses on its investments in several CVC funds. In 2008 CVC raised the largest fund in the Asia Pacific region with a commitment of 2.3bn (€2.6bn), and in July 2009 an interim close was put on its 9.5bn (€10.7bn) European Fund V. CalPERS put a total of 76.8m (€86.3m) into these funds but earned a net internal rate of return (IRR) of -44.1% on the Asia fund and -24.5% on Fund V. It put a further 58.2m (€65.4m) into another CVC fund in Asia and got a net IRR of -12.3%.

The best return CalPERS got from its investments in CVC funds comes from 118.8m (€133.6m) invested in Fund III. This generated an IRR of 43.5% which is far from the 13.1% it made on the 209.4m (€235.5) it put into in Fund IV.

When F1 is eventually sold this return should increase however, the performance of CVC will forever be shrouded in secrecy. It is a clever move since it prevents bad publicity when times are tough for the company. However, with transparency increasingly becoming a hallmark of credibility it does little for the standing of CVC, and thereby F1, in the public eye.

Article from Pitpass (

Published: 03/01/2010
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