The use of leverage has become a common occurrence in the secondaries market, typically to help access larger deal sizes as well as to boost return multiples.
While using leverage in the secondaries market is relatively less risky than in other parts of the private equity world, secondaries firms are nonetheless making sure that they are doing so as carefully as possible.
At the Private Equity Exclusive conference in Chicago last week, Mark Benedetti, managing director at Ardian, described how the global secondaries firm remains cautious in its use of debt.
“We’ve used leverage pretty consistently since 2001,” Benedetti told an audience of private equity firms, limited partners and intermediaries, on 21 July. He noted that Ardian’s investment committee is on a straight cash basis and that only when it makes sense it adds some form of debt, typically a term loan on a transaction by transaction basis or a deferred payment with the seller.
Out of about 10 transactions completed by Ardian in 2014, four had third-party leverage, five used deferred payments and one transaction was straight cash.
“There’s a role for leverage, but you have to do it very carefully,” he said, adding that Ardian has never defaulted. He also noted that it usually makes sense to use leverage for transactions that will repay within 12 to 18 months. “You have to be careful what you’re putting leverage on. If the deal repays in four years, it’s not good to use leverage.”