An engulfing deal

The biggest-ever private equity stapled deal is another example of the secondaries market’s innovation and creativity.

When Ardian’s US head Benoît Verbrugghe said at an industry conference in Cannes in January that a few sovereign wealth funds were thinking of getting “rid of some large positions”, there is little doubt he was thinking about the firm’s process with a certain Gulf-based state investment fund.

The firm’s announcement on Thursday that it has invested $2.5 billion in a stapled secondaries deal with Abu Dhabi’s Mubadala Capital – $1.75 billion in acquiring stakes in an existing portfolio of fund interests and direct investments, and as much as $750 million to a blind-pool vehicle that will invest in directs, co-investments and fund commitments – is significant for the private equity industry on several levels.

Here are five key points from the transaction:

1. It’s the largest ever stapled deal… but not the biggest secondaries deal
At $1.75 billion, the secondaries portion of the deal is mammoth but does not make the list of top five biggest-ever secondaries deals, as compiled by Secondaries Investor here. If one includes the stapled element, however, it is certainly the largest private equity secondaries deal executed. And for $60 billion-plus SWF Mubadala, it’s the first time they’ve taken on a commitment to manage other people’s money.

2. ASF VIII may be just around the corner
Ardian used its $14 billion ASF VII fund for both the secondaries investment and the primary commitment in the Mubadala deal, according to a source familiar with the transaction. Fund VII was 25 percent invested as of October, Verbrugghe previously told Secondaries Investor, which means a year after holding the final close, Ardian has most likely invested around half of the fund. Verbrugghe told the same industry conference in January he believed large portfolio sales will hit the market in the first half of the year. At this rate, the French secondaries giant may hit the fundraising trail for ASF VIII by year’s end.

3. Ardian is hoping to make new friends
“It’s unusual for a fund like Ardian to give new money to invest to a sovereign wealth fund,” Vincent Gombault, a member of Ardian’s executive committee, told The Wall Street Journal on Thursday. Gombault explained the firm’s rationale for investing in the deal is to gain access to Mubadala’s network, a strategy that may give Ardian first dibs on co-investment opportunities – a shrewd move in a time of fierce competition for assets and high pricing in auction processes for both secondaries and primary deals.

4. The deal was most likely leveraged
While Ardian would not comment on how much of the $1.75 billion is leverage, if any, the firm is known for being a staunch advocate of the cautious use of leverage in secondaries deals. The firm has used it “pretty consistently since 2001”, as managing director Mark Benedetti told a conference in 2015. This is typically a term loan on a deal-by-deal basis or a deferred payment with the seller, although he would not be drawn on specifics.

5. Secondaries firms always have a surprise up their sleeve
Hot on the heels of HarbourVest Partners’ acquisition of SVG Capital in September and KKR’s off-balance sheet deal with Coller Capital and Landmark Partners before that, the secondaries world is constantly delivering surprises. Another deal – Park Hill’s securitisation of Singapore state investment firm Temasek’s private equity-backed portfolio last year – also showed how LPs can bypass traditional sales to gain liquidity from their assets. Ardian’s latest transaction is the largest of its kind and has been heralded as “landmark” by industry sources – expect to see even more deals out of leftfield this year.

What types of new secondaries deals will we see this year? Write to adam.l@peimedia.com or @adamtuyenle