Ardian managing partner and head of Ardian USA Benoit Verbrugghe plots a course for its recently raised $9 billion Fund VI and what the French firm plans to do next.
$9 billion is a huge fund size: what sort of timeframe have you put on its investment?
It’s true it’s a lot of money but the size of the fund we decided to raise is linked to the evolution of the market today. The secondary market is linked to the evolution of the primary market, and the money that is raised every year: today private equity raises between $200 billion and $250 billion dollars each year.
It’s been that way for many years, not just the peak in 2006 and 2007. Every big industry needs its secondaries market; this market is now very active and bank’s compliance with the Dodd-Franck rules and Basel III are huge drivers. What is interesting is that you have more and more investors, like pension plans, financial institutions, insurance companies, endowments and family offices who are using secondaries as a tool.
You have a big pension plan in the US that wants to rationalise the number of relationships it has and crystallise the funds to which it is allocated. This was the setup for our $850m million deal with OMERS 18 months ago. They want to go from fund of funds to direct. All these conditions support a large fund like ours.
The secondaries market is very active; as a GP on the buy side you can find large transactions between $500m and $2-$3 billion. So it means that if you have a large fund you are able to underwrite those kinds of deals, it gives you a competitive advantage.
We have already made three transactions with the sixth fund, and the fund is already around 20 percent committed since the beginning of the year. We are staying selective with the fund, because dealflow is very important; we have the ability to select, to pick and choose the assets that we like.
Does investor expectancy mean you feel the pressure of the size of the fund?
The previous generation that we had was seven billion, including co-investment, and we have been able to control the fund in three years without too much pressure, and it’s the same here. At the beginning of the fund year of course we want to deploy money but we are not in a race. If we want to we have a five years of investment period, that’s roughly $1.5 billion a year.
Again you can find transactions today that get you there; GE Capital was $1.3 billion. If for the next generation fund we think circumstances are not the same we will raise less money. We know that we can raise and invest this fund in a good condition, with no rush; to stay opportunist, and that’s what we have done for the last 15 years.
How do you balance the risk profile of engaging leverage in your fundraising?
Yes we are using leverage, since 1999. We were one of the first to do that. But two important things; first, we are not using leverage for every transaction; it’s really a case by case basis. It depends on the profile and the quality of the portfolio. The second point is that we are cautious, and we want to stay cautious. You cannot use leverage on a statistical approach. What I mean is, we analyse everything.
You have to know exactly what is in the portfolio of another manager when you are buying interests, you have to understand the underlying companies. Ardian relies on its strong analysis of hundreds of funds every quarter, manager by manager, company by company. Even if we don’t buy them, the monitoring is automatic. Then when a transaction approaches, very often we have a huge coverage, above 80 percent, on whatever deal comes to market and its underlying companies.
We have a really big team working on this all the time, and when you have this vision, then you can understand the longevity of the NAV over the next year, and then you can decide to use leverage. It’s to maximise to some extent your equity at work. The level of analysis we use use allows us to make the correct choices in terms of leverage.
Are GP restructurings a potential use for Fund VI?
We took a look at a lot of these GP restructurings. But today our strategy is to focus on large or complex transactions composed either of a portfolio of interests or a portfolio of direct companies. That’s where we are strong, we can deliver; execution is very important.
We’re not so active right now in the GP restructuring market; if some of our competitors like to do it, then it’s good, as everyone has a way to find what’s right for them. On our side we are not comfortable enough to go into that space, to get the quality of the assets that we are looking for; and so we’ve decided not to do any type of transaction.
But you never know, if the situation came along where we knew the team very well and we liked the assets then why not but for us it’s not what we are doing right now. You will see more dealflow coming from that kind of manager in the future.