LP interview: Ardian

The firm has been active in secondaries market since 1999 but hit its stride in the wake of the global financial crisis as the likes of Bank of America and Citigroup offloaded private equity assets in order to free up capital. Ardian has raised $27.4 billion for secondaries investment since 2011 and anticipates no meaningful slowdown in deal flow. If anything, the market is becoming more diverse, with pension funds and sovereign wealth funds joining financial institutions in the ranks of sellers.

At present, Ardian’s fund-of-funds portfolio – mostly secondaries but with some primary exposure – covers more than 1,400 third-party private equity funds in Europe, North America and Asia. It accounts for about 60% of the firm’s $65 billion in total assets under management (AUM). In addition to that, Ardian offers a range of investment products including private credit, direct PE funds, infrastructure, and real estate, as well as customized mandates under segregated accounts. 

“All of these areas are growing fast. To a large extent, it’s because central banks have kept interest rates very low. There is a huge demand for alternatives. Moreover, we have been able to deliver returns above the benchmark for more than 20 years, so we see really strong demand from investors,” says Jan Philipp Schmitz, a managing director in the firm’s global fund-of-funds business who is also responsible for Asia. 

If a client wants to allocate $400 million over a five-year period, we manage it through a segregated account rather than a fund structure

Times of plenty

Global private equity fundraising reached $347 billion last year, according to Preqin. As more data become available, the total is expected to exceed the $348 billion recorded in 2014, representing the largest amount of capital committed to the asset class since global financial crisis. Meanwhile, dry powder rose from $755 billion in 2015 to $820 billion last year.

With so much capital to be deployed across almost every strategy, valuations are being driven up and the expectation is that returns will be driven down as performance of 2016 and 2017 vintage funds slips below those of five years ago. “But what we believe is different from 10 years ago – when global fundraising reached its peak – is that leverage levels are not as strong. In 2006-2007, we would have seen leverage of up to 6x on secondary portfolio transactions, but today it might be only 4x. It means that today’s investment are lower risk,” says Schmitz.

Ardian alone absorbs approximately 20% of the $30-$40 billion transacted on the secondaries market each year. As the range of sellers has diversified, so have the motivations for selling. Institutional investors increasingly use secondaries as a tool to manage their portfolios in a more proactive way.

“For example, they might want to sell 5% or 10% of their private equity portfolio so they can shift their geographic focus, reduce some GP fund relationships or increase co-investments. The market has really evolved,” says Schmitz. “We look for large transactions – ideally worth more than $1 billion because the competition is very limited in that range. Only a handful players are able to underwrite transactions of such size on their own.”

A deal completed earlier this year involving Mubadala Capital, an investment arm of Abu Dhabi’s sovereign wealth fund Mubadala Investment Company, is seen as typical of Ardian’s approach although unusual in its size. The firm agreed to pay $2.5 billion for a portfolio of 14 LP interests in North American buyout and growth funds, plus direct investments, held by Mubadala Capital. Ardian and Mubadala also made equal commitments to a new $1.5 billion private equity fund – to be managed by Mubadala Capital – that will back funds as well as make direct and co-investments.

Government-sponsored investors in Asia, including Singapore’s Temasek Holdings, have executed similar deals intended to attract external participants. In 2014, Temasek spun off holdings in 36 private equity funds into a new vehicle, known as Astrea II, and brought in six co-investors. Ardian was one of the co-investors and served as GP of the vehicle. Temasek went a step further last year with Astrea III, issuing bonds backed by interests in 34 funds, but Asia still trails the US and Europe in terms of secondaries market sophistication and volume.

“About 85%-90% of our secondaries transactions are in Western markets because the asset class is well-established and there are more sellers. However, some large pension funds, sovereign wealth funds, and insurance groups in Asia are starting to do the same now. They are offloading portions of their private equity assets to get liquidity in a market that used to be illiquid,” says Schmitz.

Ardian also sees significant demand from Asian institutional players – spread across Japan, Singapore, Korea and China – for exposure to secondaries transactions overseas. Investors from the region account for about 20% of the firm’s AUM, and their tastes are becoming more diverse. For instance, in recent years, a number of large Asian LPs have increased commitments to directly-managed private equity funds pursuing buyout and growth equity strategies in Europe and the US as well as to infrastructure funds primarily focused on Europe.

“Some have established professional teams, and they do the fund selection by themselves and invest through our platforms. Others might have just started their private equity business and don’t have the internal teams and capacity to do it by themselves, so they ask us to help through customized services,” Schmitz explains.

Into Asia

Meanwhile, European institutional investors are seeking greater exposure to alternative assets in Asia. As part of efforts to better service this demand by sourcing high-quality local GPs – as well as to deepen relationships with Asian LPs – Ardian established its first office in the region in Singapore 12 years ago. A Beijing office followed in 2014 and the firm plans to open its third Asian office in the next few months. At present, about 100 out of 1,400 funds in Ardian’s portfolio are based in the region.

On the primary side alone, approximately $3 billion has been deployed in Asia through fund-of-funds and segregated accounts, with half of this going to China. Whereas Ardian is able to write checks of $100 million or more per fund in the more developed buyout markets of Europe and North America, Asia remains a largely growth equity play. Individual commitments range from $10-15 million to $50 million.

In the early days, Ardian concentrated on pan-Asian funds raised by global private equity houses like KKR, The Carlyle Group and CVC Capital Partners. The firm has broadened its focus as the market has matured to include Asian funds launched by local managers and single-country funds. Ardian declines to back first-time managers, typically requiring track records that spans at least one fund. For example, it invested $12 million in PAG Asia Capital’s second regional fund, which closed at $3.6 billion in late 2015.

On a country level, commitments made in 2015 and 2016 include $35 million for Advantech Capital and Redview Capital, two funds that spun out in parallel – pursuing different strategies – from China’s New Horizon Capital. Ardian also allocated A$25 million ($20 million) to Pacific Equity Partners’ latest Australia and New Zealand-focused fund and $9.2 million to Warburg Pincus’ first dedicated China vehicle.

While generally cautious about sector-focused funds, Ardian invested $10 million in two Chinese managers: Lyfe Capital and CMC Capital Partners, which target healthcare and media, respectively.

“We usually avoid being too sector-focused because it could present additional risk. When targeting a particular sector, there might be regulatory changes or other disruptive events that were not anticipated when you made the investments, and your entire fund ends up exposed to that. From a risk diversification perspective, we don’t invest in too many sector-focused funds in Western markets or in Asia,” says Schmitz.

CMC and Lyfe are the exceptions to the rule in Ardian’s portfolio because these commitments were driven by demand from clients with customized mandates that want exposure to specific regions and sectors. The firm expects its allocations to become more diversified as it offers a wider range of products to investors across primary, secondary and co-investment strategies.

“Primary fund-of-funds are not a set up in a way that makes it easy to raise money in Europe or in Asia. The area that has been evolving most in recent years is the mandate business,” says Schmitz. “If a client wants to allocate $400 million over a five-year period, we manage it through a segregated account rather than a fund structure. That’s where we see the growth.” 

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• Topics
• LPs
• Fund-of-funds
• Secondaries
• Fundraising
• Ardian
• Asia