CVC Capital Partners upgraded to 'buy' by BofA on valuation, fund stability

BofA Securities upgraded CVC Capital Partners to "buy" from "neutral," citing the stock's 24% year-to-date underperformance and resilient management fee earnings (MFE), despite lowering the price target to €19.50 from €22.50. While performance-related earnings (PRE) forecasts were reduced due to a slower exit environment, MFE is projected to grow 10% in 2025, and the firm's diversified fundraising and lower U.S. exposure mitigate market risks, making the current valuation of 16x 2026 earnings attractive relative to peers like EQT.

Analysis

BofA Securities has upgraded CVC Capital Partners to "buy" from "neutral," primarily attributing this to a significant 24% year-to-date share price decline, which has seen the stock underperform the broader European private markets sector by 15 percentage points and trade approximately 30% below its April 2024 peak of €23.40. Despite lowering the price objective to €19.50 from €22.50, which still implies a 21% upside from the last close of €16.11, BofA views the current valuation as attractive, deeming the selloff overdone. This optimism persists even as BofA acknowledges weaker performance-related earnings (PRE) due to a slower exit environment, leading to 5% cuts in 2025 and 2026 EPS forecasts and a cumulative 10-17% reduction since the start of the year; specifically, 2025 PRE estimates were cut by 19% and 2026 by 11%. While 2025 PRE is still projected to grow 42% year-over-year, it remains 36% below the lower end of CVC's €400-700 million medium-term guidance. Conversely, management fee earnings (MFE) demonstrate resilience, with a 2025 forecast of €858 million, representing 10% growth from 2024's pro-forma €780 million and exceeding CVC's high single-digit growth guidance, supported by strong fundraising in Secondaries, Credit, and Infrastructure, which are projected to contribute to management fees reaching €1.464 billion in 2025. Although Assets under Management (AUM) saw a 4% dip in Q1 2025 to €142 billion due to anticipated fund runoffs, a rebound to €146 billion is projected by year-end, with more substantial growth expected in 2027 from new flagship funds, maintaining the firm's 3-4 year fundraising cycle. CVC's valuation at 16x 2026 earnings is near its historical low and presents a discount to peers like EQT, which trades at 22x. BofA's sum-of-the-parts valuation, applying a 23x multiple to MFE and 14x to PRE, supports the revised price target based on a blended 19x 2026 PE ratio. A potential overhang is the 13% stake held by strategic investors now out of lock-up, though this is somewhat mitigated by management retaining 70% ownership under staggered lock-up provisions and CVC's lower U.S. exposure (around 20% of its portfolio), making it less vulnerable to domestic market swings.

Key Decisions for Investors

• Consider CVC's current valuation as a potentially attractive entry point, supported by BofA's upgrade and the resilience of management fee earnings, while remaining cognizant of the headwinds from a slower exit environment impacting performance-related earnings.
• Monitor the realization of performance-related earnings against revised forecasts and CVC's medium-term guidance, as this will be a key determinant of future earnings trajectory and market sentiment.
• Evaluate the potential share price volatility from the 13% strategic investor stake now out of lock-up, alongside CVC's diversified fundraising strengths, particularly in Secondaries and Credit, and its lower U.S. exposure as potential mitigating factors.