This article is sponsored by Ardian
As the private equity industry becomes increasingly global, not only are US firms establishing themselves in European markets, but increasingly European firms are expanding operations in North America, particularly in the upper mid-market. Yet breaking into this space is not for the faint-hearted – it may be one of the most active segments of private equity globally, but it’s also fiercely competitive.
In the autumn of 2018, private investment house Ardian expanded its flagship European direct control buyout fund into the North American upper mid-market. Thibault Basquin, head of Americas investments for Ardian Buyout Fund, explains what it takes to strike a different note in the market.
Why did Ardian Buyout decide it was time to establish a team in North America, particularly given the level of competition?
North America is a very interesting and large market and we know this because it is not new to us. Ardian has been in the market for 20 years through our secondaries fund of funds business and our infrastructure team, so we have already developed strong networks.
However, over the past 23 years, our direct control buyout team has also built out many European businesses globally, including in North America; of the 130 add-on acquisitions we’ve completed over the past 10 years, 30 percent have been in North America. Our US team is leveraging these foundations to build out our investing opportunities here.
And how are you seeking to do that?
We are selectively focusing on identifying cross-border transatlantic opportunities with a European angle, and that makes us substantially different from our US peers. We will take majority stakes in upper middle market companies with the goal of helping them grow and diversify internationally. Our focus is on companies with an enterprise value of around $400 million to $2 billion where we can provide equity cheques of a minimum $200 million.
Given North America is a key destination for our European portfolio companies, it’s invaluable having a local team on the ground to strengthen our expansion opportunities in this region. And vice versa, we have locally empowered teams in six offices throughout Europe that can really help North American companies accelerate their European expansion strategies. We also have deep relationships with the key European corporates and families and we want to build on our reputation for being the family business partner of choice. In our sixth buyout fund, for example, 60 percent of the deals we did were first-time buyouts primarily completed alongside families.
Which sectors do you see as attractive in the US market?
There are a number of attractive sectors, but we have a long track record and strong experience in the food value chain, and health and wellness. These are also sectors that fit neatly with our sustainability agenda.
For example, through several add-on acquisitions we have helped make Kersia, which provides biosecurity solutions, one of the largest groups globally focused on food safety. In health and wellness, we invested last year in Inula, a major natural remedies business.
Can that also help to mitigate high valuations?
It can, although we are prepared to pay good prices for good quality assets and families are generally well advised and have a clue about what their company is worth. Valuations are high and will remain so for some time to come. There is so much private capital available in the market and not much sign of that slowing down.
How are family businesses different when it comes to private equity investment?
When you invest in a family business, you need very good soft skills and a history of relationship. When a family business has been very successful in the past, the owners and managers clearly know how to run their business. Private equity’s role is usually about transitioning, reinforcing management teams, implementing a tailor-made value-added governance and professionalising processes and systems. It’s important to tread sensitively.
When we invest in family businesses, we also ask the owners to reinvest a proportion of their proceeds into the company – in order to keep usually between 20 percent and 40 percent of the share capital. That is powerful because it signals to employees, customers and suppliers that the family is very much committed to the company’s continuing success and creates a strong alignment of interest.
You mentioned sustainability. Why is it important to you?
This has become more important as the shift towards private capital looks set to continue increasing. It’s true that it’s a hot topic now, but we’ve been working on applying sustainable principles for more than 10 years. We were an early signatory to the Principles for Responsible Investment. We have a duty to all our stakeholders to behave in a responsible and sustainable manner. It’s an area where Europe has really taken a lead and, because our firm has been committed to sustainability for so long, we believe we can bring something different to North America.
Our commitment has to be holistic, so it’s at the heart of what we do on a daily basis, from managing our investment portfolio through to the way we operate as a firm. Since 2008, with the management’s agreement, we have also shared a portion of the capital gains we make from investments with all employees in portfolio companies. You have to consider the contribution all employees make – not just management and owners – to creating value in a business. Since we launched that initiative, we’ve distributed more than €48 million to over 20,000 employees.
How else do you work with portfolio companies when it comes to sustainability?
In 2015 we were one of five French private equity firms to launch the Initiative Climat 2020, which aims to reduce carbon emissions in majority-owned portfolio companies for which the subject is considered material. Since 2009 we have created, in conjunction with management teams, an ESG roadmap for each of our portfolio companies – that’s more than 100 businesses. Roadmaps are monitored and updated every year.
Portfolio companies find this very useful as it enables them to communicate progress both internally and externally, and they can see the impact of what they are doing. It helps us because we can provide easy, almost instant access to ESG KPIs to LPs, who are increasingly seeking more information on sustainability.
What about Ardian itself? How do you apply sustainable practices within the firm?
This is fully integrated in our firm and encompasses everything we do, from leveraging young talent via our millennial committee, which feeds back to our board on what we should be doing, through to ensuring we promote equal opportunities in our firm.
We established the Ardian Foundation, which is focused on promoting education and social mobility, 10 years ago – that has so far had over 200 beneficiaries and around 30 percent of our staff are involved with it. Also, as a firm established by a female leader – Dominique Senequier – female participation in our organisation has always been important, and we established a women’s club a year ago to support the development of our staff.
We also run initiatives such as a disability employment week. We have the Ardian Green Challenge as well, an employee-led initiative, which aims to reduce waste in our organisation, including reducing packaging and water and energy consumption.
Lastly, our firm is majority-owned by our employees, with around 70 percent of employees invested in the management company. As with our portfolio companies, we want to ensure that all employees have the opportunity to share in the value they create.
And how will this approach develop in the future?
We now have a 10-year track record of viewing our organisation and our portfolio companies through a sustainability lens and it’s clear that this has contributed to our growth; maximising financial returns and creating sustainable value for stakeholders are not mutually exclusive, they are intertwined.
Now, we believe we need to quantify more precisely the impact we have so we have decided to measure this using the UN’s Sustainable Development Goals.
We’re working to develop a method of measuring and reporting how portfolio companies manage their operations on a daily basis, what their impact is on the supply chain, their customers, and their products and services.
We’re continually looking for ways of improving what we do and as pressure increases on the private equity industry to demonstrate sustainable returns, we want to continue to be at the forefront of developments.