Ardian’s $18bn secondaries mega-fund highlights the shifting GP-LP relationship

The desire of private equity firms to hold assets for longer is creating misalignment with their LPs – and conditions for the secondaries market to thrive.

Mega-funds have traditionally been the domain of private equity giants Blackstone, CVC Capital Partners and Apollo Global Management, but that looks set to change.

Last week Secondaries Investor reported that investment firm Ardian is seeking $18 billion for its latest secondaries programme, ASF VIII. The figure comprises a $12 billion secondaries vehicle and $6 billion of co-investment capital.

Ardian’s secondaries funds have shot up in size since it spun out of French insurer AXA Group in 2013. The Paris-headquartered investment manager raised $14 billion for the 2015-vintage ASF VII, double that raised for Fund V, the last raised under the auspices of its former parent. ASF VII had a $10.8 billion secondaries pocket.

ASF VIII has so far attracted capital from a range of limited partners including the Florida State Board of Administration, Caisse de dépôt et placement du Québec, Fubon Life Insurance, Michigan Department of Treasury and an array of endowments and family offices, according to data from PEI and the UK’s Companies House.

If it raises $18 billion, ASF VIII would become the sixth largest private equity fund ever raised, alongside Blackstone Capital Partners VII and just behind CVC Capital Partners VII, which raised the equivalent of $18.15 billion in euros (€16 billion). That Ardian believes it can raise so much to acquire second-hand stakes in funds suggests there is a shift underway in the private equity market.

Primary investors have for several years bemoaned a lack of decent acquisition targets, a situation exacerbated by the massive amounts of dry powder raised for the strategy. In his annual letter to investors last week, Warren Buffett threw cold water on the idea of Berkshire Hathaway making a mega-acquisition in 2019, saying “prices are sky-high for businesses possessing decent long-term prospects”.

At the same time, private equity firms are increasingly looking at ways to hold onto businesses they like, beyond the strictures of the 10-year vehicle. UK buyout firm Bridgepoint, which owns Secondaries Investor‘s parent company PEI Media, is understood to be selling Dorna, a Spanish sports management company, to another of its funds. The firm clearly sees more value in keeping a profitable asset than selling it.

This desire for longevity is seen in new fund structures and approaches to raising money. In 2017 Core Equity Holdings, founded by former Bain Capital executives, raised around €1 billion for a fund designed to hold investments for at least 10 years, one of the largest debut funds ever raised.

In January, sister publication Private Equity International reported that Cranemere Group, led by Jeffrey Zeints, a former economic advisor to President Obama, had collected around $1.5 billion for long-hold investments. The group will be structured as a holding company, with shareholders instead of LPs and cash generated by portfolio companies going straight to the firm.

The desire of GPs for a longer hold period can create misalignment with the LPs in their funds, who might prefer liquidity now over greater returns in the future. This creates demand for secondaries capital, which in turn produces behemoths such as ASF VIII.

The Ardian platform had $90 billion in assets under management as of last year, including $51 billion in secondaries. These funds cover early secondaries, infrastructure and energy, as well as vanilla private equity secondaries.

Though by far the largest secondaries firm, there are plenty of other big fish. Lexington Partners is targeting $12 billion for its latest flagship secondaries fund, while Coller Capital, Blackstone Strategic Partners and Goldman Sachs Asset Management are targeting a combined $24 billion. A glance at PEI data reveals that of the 100 highest-targeting PE funds in market, more than 10 are secondaries funds.

While ASF VIII’s entry into the mega-fund club is likely to be a first, it’s unlikely to be the last.

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