Looking Over the Horizon w/ CVC's Rob Lucas

0:04Previously on Dry Powder, Rob Lucas, CEO of CVC, shared what mountaineering has taught him about investing, from building teams that perform under pressure to planning for the unexpected. Today on the show, we'll turn that lens toward the future of private equity. I'll ask Rob how CVC is navigating one of the toughest fundraising markets in decades and why performance and trust remain the bedrock of the LPGP model. We'll also discuss CBC's firm-wide embrace of AI.

0:29Rob Lucas: I use it every day. I have a Monday morning meeting where we have all the investment teams across the globe on the call. I make it clear to everybody that we do monitor usage and we want everybody to be using it. Finally, Rob will explain why he believes Europe remains one of the world's most compelling markets for generating buyout alpha. It's the very complexity, it's the level of bureaucracy that mean that people look at the macro in a less positive way, which actually plays so well to private equity. We can just bring so much to the show. I'm Hugh MacArthur, Chairman of Bain's Global Private Equity Practice, and this is Dry Powder.

1:18Rob, let's shift gears and talk a little bit about the future. I'm often asked to comment on the future in my role, and I always protest that my crystal ball is very clouded, and I'm sure yours is much clearer than mine. So I'd like to start by asking you how you're navigating the current fundraising environment, especially in the buyout world where things have been pretty tough over the last couple of years. Yes.

1:41Rob Lucas: From a fundraising perspective, we have, I think, raised over 23 billion euros over the last 12 months to Q1 2026. And that's linked very, very closely to another statistic, which is over the last five years, through all of this uncertainty, all this volatility, we have realized and returns to our investors over 50 billion euros of capital at a four times multiple of money in the 29 % IRR. And so the reason I mentioned that in relation to the fundraising is because I really do think that throughout, but particularly at this moment in time, the ability to raise funds is very, very closely linked to the ability to make realizations and return capital.

2:30Rob Lucas: And not just because that's returning capital to our LPs. That's very, very important. Of course, there is a sort of recirculation aspect of that. But it's also within our industry, as I mentioned earlier, it's a long-term industry. The other wonderful thing about it is that it's very transparent. It's cash on cash. The funds have a start, they have a finish. and so actually tracking performance is very straightforward over time and so rlps as you know and you help them a lot in it and you help the industry a lot in it but the level of analysis that is done the level of understanding is very very deep indeed and again that's a great thing because it gives everybody in the industry the confidence that if they ultimately do perform that will be very transparent, they'll be recognized by the LPs, and that will be rewarded by the ability to continue to raise funds when needed.

3:34Rob Lucas: And our recent Catalyst fundraising that we've done was an illustration of that. We set out looking to raise perhaps about 1.75 billion, something of that sort. We've ended up over 3 billion. We've raised the hard cap about three times during that fundraising. And that's indicative of the fact that if there is a track record and a level of trust there amongst the LPs, then there is capital there available and funds can be raised. But I think it all comes back to that trust. And I do think over the last few years, trust has been wobbled somewhat within the industry. But of course, this always happens.

4:17Rob Lucas: Every time we go through a dislocation or a period of volatility, whether it was the 2000s dot-com bust, whether it was the later 2000s GFC, whether it's this period of time, there is always a flight to quality from LPs. The LPGP model is a very, very powerful, very strong, very long established model, but it does go through cycles. And at this point in the cycle, there is a gravitation towards GPs that the LPs really know, really trust to deliver for them and who have delivered for them over time. Absolutely. And I think the characterization of the current fundraising environment as wobbled, quote unquote, is a very good one and a good one.

5:01And one of those wobbles, depending on how you view it, is the debate around private wealth and its importance to the industry going forward. Obviously, private wealth is half of the world's total wealth. It has very little exposure to private assets compared to institutional wealth. What is your view of this debate that LPs and some GPs are having around private wealth? And how does that fit into CVC's overall platform and thinking for the future?

5:28Rob Lucas: I'm a very, very strong believer in the strengths of the LPGP model. I think it's been very, very successful over decades through cycles. And it is fundamentally matching long-term capital with long-term investing. And I think that's sometimes a feature that is, if not underestimated, somewhat can be a little bit taken for granted. Having said that, I see the private wealth as a democratization of the access to the alternates market. And I think that's a very positive thing indeed. One of the disappointments for me over many years is that actually the private investors have not really had easy access to the asset class.

6:20Rob Lucas: And I think the fact that these products do provide that access is good. And it will take people time to get used to exactly the features of it. The fact that this is only partially liquid. The fact that it will be more flighty capital than institutional capital. So we all need to adapt. The private investors and the market needs to adapt to this. But I do think it's a positive and I think it's a good thing. And I think we will see growth there. But of course, certainly for us, it remains a very small part of what we do. I think there's huge potential within that, but I think we need to feel our way.

7:04Rob Lucas: And it's all about performance. And I think providing we are delivering outstanding performance, both to our institutional clients and our LPs or to private wealth clients, then both of these distribution channels can work very happily alongside each other. Now, Rob, listeners of this show will know, and I often have to caution guests, that if I don't use the term AI at some point during the conversation, there's a 50-50 chance that Bain will not publish this. So I have to go there. So I'm going to use the term AI and ask you how CVC is approaching AI across the firm, as well as the portfolio companies?

7:45And how are you using AI personally? Well, AI is hugely important.

7:54Rob Lucas: And I don't think we can underestimate how important, how crucial it will be to the GPs in terms of their organizations or indeed the market as a whole and our portfolio companies going forward. We are certainly taking this very, very seriously. We're putting huge resources behind it. And I think that's one of the real benefits of scale, Hugh. If you haven't got real scale within your organization, it's challenging because the costs of doing this are substantial. The resources that we need to apply in terms of the people resources are very, very material indeed. So we are using it across all of our portfolio companies at the moment.

8:42Rob Lucas: We recognize the importance of large language models quite some time ago. We had a business called Żabka, which is, you may be familiar with it, it's a Polish convenience store chain. And in fact, in terms of us as a GP learning from our portfolio companies, I think it's an interesting story because we need to be looking for lessons and the ability to learn, as I was saying earlier, from all sources. And Shabka had an amazing, have an amazing management team who really embraced AI in the early days. And I'm talking about 2018, 2019, maybe even a little bit earlier than that. And we could see the benefits that this was producing for the business in terms of exactly how to position their stores, exactly looking at all the data in relation to pedestrian flow on pavements, the way to dynamically change pricing within their stores, exactly what products to select, where to position all of this.

9:48Rob Lucas: And the results were really amazing. And one of my colleagues, this man Soka, said, this is incredible stuff, everybody. These large language models are amazing. They're going to create real change. And so we took the whole of the leadership team of CBC over to Singularity University in about January 2020. And so I think part of this is really being onto it and embracing it for a period of time. I always think that being an engineer, I think the ability to imagine and visualize exponentials is very, very difficult. And the fact that you can have exponential growth going on within a market, which we absolutely are within AI.

10:37Rob Lucas: And that for many, for a considerable period of time, it looks as though nothing's happening. And then, of course, it really ramps up so fast that if you're not onto it and not fully embracing it by then, of course, it's all too late. And so that's really meant that since 2020, since we went over to Singularity, we've been factoring this into everything we do. And I use it every day. I have a Monday morning meeting where we have all the investment teams across the globe on the call. and I make it clear to everybody that we do monitor usage and we want everybody to be using it. A lot of the younger people point out that the universities spend most of their time trying to stop people using AI and yet they come to an organization like CBC where we're saying it's not a question of if you use AI, you're in the bad books.

11:36Rob Lucas: If you don't use AI, you're in the bad books. And so it's all about usage and it's all about familiarization. Even if people think that the benefits that are being created as of this moment in time are not as awe-inspiring as they might think, it's still a question of factoring it into your everyday life in as many opportunities as you can because it's getting more and more powerful by the day. Totally agree. And the toothpaste, as they say, is out of the tube. It's not going back. It's here to stay. So we need to figure out how to use it. And I really like your leading from the front and using it every day and expecting others to do the same.

12:14I want to go back to the beginning of our conversation, Rob, where we started talking about CVC's European legacy, as Europe has obviously long been central to the firm's strategy. How are you seeing the opportunity set across the continent today for buyout investing?

12:29Rob Lucas: I really think the opportunities within Europe are as strong as they've ever been, Hugh. I don't know whether you're seeing the same from a Bain perspective, but certainly there are two or three major trends that I do think are pointing to Europe as I've always felt it was a great place for private equity. But it really is now as much as ever. I really think the ability to create alpha is such an important part of what our industry is about. And all the statistics show that we are able to create so much more alpha in Europe than we can, for example, in the US. The US has tremendous tailwinds behind the market, which is fantastic.

13:13Rob Lucas: But actually, the overall net returns for private equity in the US and in Europe over the last 10 years have been very similar. at around sort of 14, 15%. The difference is that nearly all of that within the US market has been beta. And in alpha, depending on which statistics you look at, between a third and a half of that has been alpha. And the reason that's so important is because not only is it what we're paid to do, what we're paid to create, it also gives you much greater insulation from volatility in the market. and obviously changes in the amount of beta that's out there. For CVC, our returns over that same period have been between 21 % and 22%.

14:00Rob Lucas: By definition, all of that additional increase is alpha. And so the ability to create alpha in Europe, and that's all about being local on the ground. It's all about the network, and it's all about being able to find opportunities that are a little bit hidden away, buy them well, but then add real value to them. And it's that value creation aspect, which is so powerful. And I know you've talked to others on this particular show about that sort of aspect of value creation. And it is a massively important part of it. But within Europe, it's the very inefficiency, it's the very complexity, it's the level of bureaucracy that mean that people look at the macro in a less positive way, which actually plays so well to private equity.

14:52Rob Lucas: We can just bring so much to the show, not least in terms of building champions. I think that's an extremely insightful point, Rob, that while the returns are roughly the same between European buyout and US buyout, when you factor in with beta or the public market equivalent, it's actually much higher on a relative basis in Europe than it is in the US, which suggests that the alpha outperformance has been substantial. I think that's a really good data point that not enough people have brought out. We've talked a lot about convergence of return and the diminishing liquidity premium in the U.S. market because of the stock market performance.

15:27But we haven't actually talked as much about the relative outperformance of the private equity asset class in Europe versus the public market comparables. So I only have one more question for you, and then I'll let you go, Rob. The question is, and I'm going to leave this very open-ended because I'd love for whatever pops into your head first to be driving your answer. Where do you see CBC over the next five or 10 years?

15:49Rob Lucas: Well, I see the next five to 10 years as a very exciting period, I've got to say, as a first off. I think we're going to see the existing trends really continuing. And I think we can be a real beneficiary of that. Flight to quality. I think we're really seeing this from the LP's perspective, a real desire to invest, continue to invest, increase their exposure to the asset class, but becoming ever more selective about which GPs that they are putting their money with and acting as custodians of their capital. And as a result of that, I think there will be continued consolidation in the marketplace within the GP community.

16:35Rob Lucas: And I also think that the ability to have real scale or real specialization. It's got to be one of the two. We will also see a continued development of the different distribution channels. I think that will really go on. But where this is all pointing to me, and I think the major point I'd make here, is that it's all going to come down to performance. And over the last few years, I think there has been a common theme of building assets, a real focus on building assets. But actually, once that has played through, it's going to be about the performance that people can deliver. And that's why our focus absolutely remains on performance, producing outperformance.

17:28Rob Lucas: And that is why when I was talking earlier on, one of the absolute foundation stones of CBC alongside the culture is continuing to produce outperformance for our investors. whether they are insurance, whether they are private wealth investors, or whether, of course, they are longstanding LPs in the institutional channel. And that is going to be what really differentiates and what really drives people's growth as we move through the next decade. Rob, I really want to thank you again for being on the show. The conversation has been strategic, it's been tactical, it's been philosophical, it's been educational, and it's been entertaining.

18:11I don't get all five of those on every show, so I really enjoyed it. I'm sure our audience did too. Thanks again. Thanks very much, Hugh. It's an absolute pleasure.

18:23I'm Hugh MacArthur. Thank you for listening.

18:33Thank you.