Pricing is full in today’s secondaries market, having reached a post-2007 high in July, according to Cogent Partners. This makes it a seller’s market and as a result, supply has increased more than ever during the last 18 to 24 months, some sources have said.
Secondaries transaction volume is expected to exceed $30 billion this year. And there are various estimates floating around as to potential dealflow for certain transaction types such as fund recapitalisations, which Pantheon reckons will be at least a $70 billion opportunity over the next few years.
Still, some market participants are worried about the amount of secondaries-focused capital that’s been raised in recent years – which one estimate put recently at $50 billion– and its effect on pricing and returns. That’s the reason why New Jersey’s state pension has pulled back from making secondaries fund commitments, for example.
It’s caused concern among some fund managers too: “Most of the buyers I’ve spoken with are behind their targeted deployment pace, but there are some that have been incredibly aggressive despite high valuations,” one advisory source said.
One of those aggressive firms is Ardian, which has deployed $8 billion from its secondaries programme since September 2013 (by comparison, the firm spent about $4.3 billion on 21 secondaries transactions during the prior 12-month period). Its secondaries programme includes its $10 billion Fund VI, which closed in April and is now roughly 50 percent deployed. Deals include the $1.3 billion purchase of private equity stakes from GE Capital.
Ardian’s quickening pace has raised some eyebrows in the industry. “They’re basically putting a ton of money to work at a time when the public markets are at all-time highs,” said one source. “If I was an LP in their fund, I’d be a little nervous,” another source explained.
But the firm insists such worries are unfounded. For starters, it hasn’t paid any premiums and has used leverage cautiously, Benoit Verbrugghe, managing partner and head of Ardian’s US activities, told Secondaries Investor.
“Both we and our LPs recognise that for many private equity firms, this may be an expensive time to invest. However, this is primarily true for simpler transactions,” Verbrugghe said, referencing the large, complex transactions Ardian tends to target.
While the Ardian LPs I reached out to – including the Tennessee Consolidated Retirement System and The Florida State Board of Administration – wouldn’t comment, Verbrugghe noted the firm’s investors trust that it makes calculated decisions and are ultimately attracted by “two fundamentals: visibility and quality returns”.
The firm’s Fund III, a 2004-vintage, was showing a 62 percent gross IRR and 1.98x gross multiple at the end of last year, according to Ardian’s annual report. Its Fund IV, a 2006-vintage, had a gross IRR of 14 percent and a gross multiple of 1.54x, while its 2011-vintage Fund V was generating a 35 percent gross IRR and a 1.56x gross multiple.
If Fund VI echoes that track record, Ardian will have effectively proven that high valuations alone won’t keep smart managers from finding value for investors. And should secondaries prices continue to climb, Ardian may be in a very envious position indeed among peers who’ve slowed their pace.