Why EQT and CVC walked away from AUB – and what it reveals about private equity dealmaking

Deal breaker: EQT and CVC Capital’s exit from the AUB buyout follows a familiar pattern of private equity firms walking away from Australian targets after due diligence. Picture: iStock

Want to understand how private equity firms really operate? The collapse of the $5.2bn EQT-CVC Capital bid for AUB Group offers a revealing window into the world.

It reveals dynamics that play out when private equity firms team up on buyouts – and why those partnerships can be a warning sign rather than a vote of confidence.

Scenario one: The “you go first” dance

Picture this: Two private equity firms are circling the same target. Both are interested. One picks up the phone to the other.

“Fancy partnering on this?”

“If you’re keen to lead it, we’ll come in with you.”

Sounds collaborative, right? But here’s where it gets interesting.

The lead firm starts its due diligence and finds something it doesn’t like. Could be anything – broker retention risk, margin pressures, growth rates coming off. It goes back to its partner.

“Look, we’ve had a closer look and we’re not comfortable. But you should proceed if you still like it.”

The response is almost always the same: “Well, if you’re not doing it, we’re not either.”

Deal dies. Both firms walk away. No one loses face because they were “partners” and the decision was supposedly mutual.

Some market observers reckon this may well be what happened between EQT and CVC over AUB.

When CVC joined EQT’s bid, conventional wisdom suggested the partnership strengthened the proposal - more capital, shared risk, two sets of eyes on the deal.

But others saw it differently.

To them, the worry was that neither firm was confident enough to go it alone – and that when one got cold feet, the other would inevitably follow.

Scenario two: The investment committee problem

Here’s the thing about private equity firms: the problem is rarely the local team.

Take CVC Capital.

Its Australian operation is run by Richard Blackburn, a former Morgan Stanley banker widely regarded as a shrewd investor.

Sources say CVC had been examining AUB for about a year through adviser Macquarie Capital.

They knew the business inside out.

But knowing a business and getting a deal approved are two different things.

The hurdle, sometimes, is not in Sydney or Melbourne – it’s in London, New York, or Stockholm, where investment committees sit and where memories are long.

CVC’s global committee is considered particularly demanding, possibly still scarred by its disastrous 2007 investment in Nine Entertainment.

With about €201bn under management, CVC turns up for plenty of Australian auctions.

It rarely follows through.

Its 45 per cent stake in Australian Venue Co for $945m is the exception.

In the listed space, it’s looked at APM Human Services and Brambles without completing either transaction.

EQT, advised by Goldman Sachs on AUB, has completed deals in Australia – but also has a notable track record of pursuing targets and not following through.

Iress, Vocus Group, Perpetual – all pursued, none completed.

The Swedish firm also has form entering data rooms with a bid, then attempting to negotiate the price down later.

The cynical view

There’s a theory in investment banking circles that some private equity firms use competitive bid processes as free market research.

Lodge a bid, get into the data room, understand the industry better, then walk away.

Like trying on clothes without buying.

Is there evidence EQT or CVC did this with AUB?

No. And it would be unfair to suggest that was their intention.

But the pattern is clear enough that sophisticated investors factor it in.

When certain firms show up with bids, the market discounts the probability of completion.

What actually happened?

The most plausible theories for what spooked EQT and CVC are key person risk – that too many star brokers might leave post-acquisition, making the business less valuable. Or concerns that premium growth in insurance broking is moderating, making the numbers harder to stack up.

The AUB board’s statement that $45 per share “appropriately values AUB in the current market environment” suggests they’re not scrambling to find another buyer at any price.

The more interesting question is whether strategic buyers now emerge.

The obvious names are Arthur J. Gallagher, Marsh McLennan and Aon – global insurance brokers with the scale and rationale to consider an acquisition. Whether any materialise is another question.

EQT and CVC were thought to be offering full value, which raises the question: who pays more?

For AUB, the episode is a reminder that private equity interest doesn’t always translate into private equity ownership.

Particularly when the firms involved have track records of walking away.

And for investors watching similar situations unfold elsewhere?

When two private equity firms with histories of deal breakage team up, it might be less of a partnership and more of an insurance policy – for them, not you.