This article is sponsored by Ardian.
Customised mandates, separate managed accounts, funds of one – investment solutions tailored to an investor’s needs have many names and come in different forms, but one thing is certain – their popularity continues to increase. Ardian is well-known for its secondary business, having made a number of landmark transactions over the past years. Less in the headlines but growing just as strong is its mandate business. Martin Kessi, managing director in the fund of funds team, and Krista Oertle, head of mandate solutions in Ardian’s Zurich office, tell us more.
Are mandates a new business area for Ardian?
No, tailored mandates are not a new business for us. We have been doing this for over 20 years. Especially since the spinout of Ardian from AXA Group in 2013, we have broadened our offering and added a number of new mandate clients. On the one hand, the overall investor demand in the market for customised portfolio solutions has grown significantly over the past years, visible also in our growth rates. On the other hand, mandates are one of the strategic focus areas of Ardian and as such, the results of our continuous efforts to improve our services are yielding results.
Where is demand coming from?
We have long investor relationships with many pension funds, insurance companies and family offices so part of the demand is coming through these existing relationships. At the same time, new pension funds, insurers and family offices continue to enter the market and often prefer to partner with an established manager such as Ardian, who can deliver a complete investment solution. We are also talking to investors, who traditionally have not been the main target segment for mandates. Private banks, for instance, are increasingly interested in finding solutions for their high-net-worth individuals and how they can access an asset class that has been geared towards institutional investors up to now.
Geographically, much of the demand is coming from our traditional investor regions, meaning Europe, North America and Asia. However, the landscape is broadening. For instance, we just closed our first Latin American mandate a little while ago, so it is becoming global for us.
What are investors looking for in mandates?
Lower fees are often thought to be the main reason for choosing a mandate over a fund of funds commitment. While this is a very important aspect of the mandate offering, in our experience, other aspects matter just as much. What investors generally seem to look for is flexibility and something that meets their needs. This comes in various forms and can be fully delivered through a tailored mandate solution.
At Ardian, we tailor a mandate around each client’s organisation, investment needs and preferred ways of collaboration. We combine funds across private market strategies, segments and regions. For this, the large fund of funds platform that we have today is key, with around $5 billion on average invested in primaries and secondaries an on annual basis. We offer discretionary and non-discretionary mandates, giving investors the choice to decide how much they want to be involved in their mandate. Our investors define what is their investment horizon and targets and when those targets change, the mandate solution adapts. And on top of this our investors get the operational and reporting services they need.
Do investors want to be involved in their mandates?
Some, yes, to a varying degree. If you as an investor know you do not have the resources to be involved in the investment process and portfolio planning and are looking for a reputable, trusted partner to outsource your private market allocation, you probably will opt for a discretionary, hands-off solution.
But we do have mandate investors who want to participate in the decisions on where the assets are being invested, want to read the investment memos and have the final say and we can accommodate that. All in all, the needs from the investor side are complex and a mandate manager today needs to be able to understand and adapt to those needs.
What is the role of secondaries in your mandates?
We have mandates that do not have any secondaries and we have mandates in which secondaries are a key allocation type. It really depends on the investment targets of the investor. Often if we put together a comprehensive portfolio solution for a client, particularly if the investor is new to private equity, and secondaries have a significant role in ramping up exposure, in addition to the diversification benefits that they bring to a portfolio. You might see higher allocations to secondaries in the first one or two years. Naturally, this allocation tends to change over time, particularly when we are talking about mandates that invest over 10, 15 or 20 years.
When does a mandate not make sense?
We can recommend a mandate solution to all clients who want an individualised private market investment programme tailored to their needs. Due to the initial effort at the beginning of such a programme, mainly with legal and operational setups, a mandate is generally worthwhile only from a certain volume. The cost savings in relation to management fee must compensate for these initial fixed costs.
What matters when investors select a mandate manager?
Fees and performance are the most typical reoccurring themes, of course. But at the same time, the differences between managers can be very small on these two aspects.
A private market mandate is often longer in term and larger in size than a single fund of funds commitment and the investor’s relationship with the manager tends to be closer.
When choosing a manager, it often comes down to soft factors; it is like choosing a partner: how comfortable do you as the investor feel with the manager, how well can you communicate with them, how much do you trust them, how well can they adapt to your needs? A mandate solution provider today needs to have the right service package, in addition to offering attractive fees and being able to demonstrate a good track record, just to make a difference between you as a manager and your competitors.
Do you see the growth in private infrastructure in mandates?
Infrastructure is becoming more and more important for our investors. We already have mandates which are focused on infrastructure. And we have mandates which invest across private market strategies, infrastructure being one of the target investment segments. Looking at the mandate proposals we have already made for 2018, infrastructure – even if in absolute terms still behind private equity – has grown the fastest. Going forward, we would expect to see more mandate opportunities on the infrastructure side.
What do you expect to see in 2019?
We expect the growth to continue. Current investors aim at maintaining or increasing their exposure to the private market. We continue to see many new investors entering the market and new investor segments getting interested. And with this overall growth in interest for the private market, the demand for customised mandates will continue.
Martin Kessi joined Ardian in 2008 and is managing director in the firm’s fund of funds team, while Krista Oertle joined the firm in 2013 from Partners Group and is head of mandate solutions, based in Zurich office.
This sponsored article appears in the December issue of sister publication Private Equity International‘s LP Perspectives 2019.