Pair a dice lost in Vegas will end the game, but in Private Equity the game continues even as the buyers rest. As a naïve seventeen-year-old college freshman, a college professor asked me for my CV. I stared at him blankly. Sensing my slack jaw meant no response was imminent, he expanded “your curriculum vitae?” My stare continued as I wondered if the term was connected to the peculiar hit song, In A Gadda Da Vida. It turned out to be the Latin term for resume. I resumed using the term resume for the rest of my life, but muttered “Ah CV” whenever I again heard that abbreviation, until bankers began calling us five or six years ago to discuss our CV prospects. I was puzzled anew, as I was during my freshman year, until they explained a CV was what the cool kids in PE were now doing and it meant a “continuation vehicle”. I was a bit mystified at the need for this as I viewed our job to include exiting our investments and I viewed our fund as a continuation vehicle. The banker explained the “CV” could be used to “crystalize” our carry and to avoid “compromising” our valuations. In one sentence, the banker had created a new acronym, a new use of a verb and substituted a more opaque word for “lowering”. I did not feel that the CV fit with our program of running the railroad on time with respect to exits and trying not to manipulate our NAV. In the Broadway show The Producers, the promoters earned money by intentionally producing a failing show. Here a GP crystalizes carry without having to realize a gain.
A quick trip back into the origin of private equity partnership structures is helpful. In the eighties, the better known firms like Forstmann-Little and KKR had a heads we win, tails the investors lose structure in their partnership agreements. By that I mean each deal would stand alone in a fund where the GP received 20% of the gains, but if a deal lost money, the GP lost only at its usual 1% capital contribution rate. The funds were really a box of CVs. Consequently, a GP could collect well over 20% of the gains in a Fund where one or more deals lost money. Over time, funds like Olympus introduced “collective guilt” partnership structures where investment losses offset gains to determine net carry and Olympus invented the fund preferred return to insulate investors against weak performance. The banker was recreating a world where investors would invest in a single asset Fund and would no longer have the protection of multiple assets to mitigate the risk of loss. Previous “pass the parcel” deals have been panned, but “possess the parcel” was the new fad. The same investors who opposed the Forstmann structure were funding these deals directly through rollover or by funding secondary funds that have become the largest buyers of CVs.
The other explanation for creating CVs were to hang on to trophy assets, to allow time to “grow” into one’s expected valuation and to gain liquidity for fund investors that needed it. All of these goals were imprecise and therefore achievable. On the other hand, companies that were the subject of failed sale processes became “trophy” assets as GPs preserved NAV by selling to themselves, although some CVs later went bankrupt and freed more space on the shelf for other trophies. Remarkably, many of the CV companies had been held less than three years by the fund. Liquidity was promised to some, but many had no option but to participate in the CV. As for the CV reaching expected valuation; the application of CV lipstick did not always a princess make. In the old cartoon Popeye, a character named Wimpy would often appear in a café declaring “I will gladly pay you Tuesday for a hamburger today”. Tuesday never came.
The CV class of 2019-21 are now reaching their sell by dates and some have become Wimpy or Klarna as we see the creation of CV squared, where the companies are being placed in a new CV for the same reasons they went into the original CV. There is even chatter about the first CV cubed being offered in the markets as the CV world is becoming a backdoor into an evergreen structure to be known as a “Kick the Can Down the Road Fund” for which there is no ending; similar to the riddle of how many leaps must a frog make to cross the road if he leaps half the remaining distance on each leap? Data provided by Ion Analytics tells that in 2023, only 73% of single asset CVs priced at 91% or more of NAV which shines a light at the conflict question of the GP buying from itself and alerts olfactory senses about the balance of the GP’s valuations. Perhaps each CV will rival the Rocky movie franchise for longevity and roman numerals, but rarely does the avoidance of a true market test reveal genius.
I’m Rob Morris and I approved this blog.