Ardian dances to its own tune

A mix of envy and caution. That's how one seasoned secondaries professional summed up the market's view of Ardian. 

The envy is understandable – the former AXA captive's assets under management have almost doubled to $60 billion in the four years since it spun out of the French insurance giant. The firm has raised more capital in the last five years than many long-standing firms, placing it 24th in the latest PEI 300.

In April, the Paris-headquartered firm announced it had closed a $2.5 billion secondaries deal with Abu Dhabi's Mubadala Capital in a stapled transaction that will see the sovereign wealth fund manage third-party capital for the first time.

In a market that has seen two years of declining transaction volume, Ardian's ability to deploy billions into deal after deal has left competitors lagging. “We got blown out of the water,” a firm that bid on the Mubadala portfolio told Private Equity International, referring to Ardian's $750 million primary commitment to the sovereign fund's debut blind-pool vehicle. 

As the market leader, Ardian must know everyone is watching. But according to its head of funds of funds and private debt, Vincent Gombault, the firm isn't watching them. When PEI sits down with Gombault, who has been at the firm for nearly two decades, he admits keeping an eye on the competition is not something Ardian spends much time on.

“I will not speak about my competitors because I don't know them very well,” Gombault says. “I don't see them very often; I don't know their strategies. I speak with a lot of investors, I speak with a lot of GPs, but to be transparent I have never met Jeremy Coller. I have met the head of Lexington [Partners] once but would not be able to recognise him in the street.”

Gombault is forthcoming about the Mubadala deal. Ardian initially passed when the sovereign wealth fund launched an auction at the end of 2016, asking for a $2 billion stapled deal comprising $1 billion in secondaries stakes and $1 billion in fresh capital to seed a blind-pool fund.

“It was a little bit aggressive,” Gombault says of Mubadala's initial pitch. Ardian sidestepped the auction process and came back with a different offer: $1.75 billion for a different secondaries portfolio and $750 million in capital for the blind-pool.

“We could have lost the deal,” he admits. “They could have said, 'Sorry, we want to sell $1 billion'.” But the bet paid off, and Ardian walked away with a secondaries portfolio containing 14 LP stakes in funds managed by Raine Partners, Carlyle, BDT Capital Partners and New Horizon Partners, as well as 14 direct stakes in companies such as EMI Music Publishing and Restaurant Brands International, owner of Burger King.

At $2.5 billion, it is the largest-ever stapled deal. But Ardian did not supply all the capital itself; the deal was syndicated with 20 co-investors in a 50-50 split. 

The proportion of the $14 billion ASF VII Ardian deployed is even smaller considering the firm used 45 percent leverage to fund the secondaries purchase. No leverage was used on the unfunded commitments for the blind pool Fund II, Gombault says.

Reactions to the deal have ranged from admiration to incredulity, with several sources telling PEI they questioned Ardian's sense in deploying huge amounts of capital in single deals. “Astronomical” was how the managing director of one rival secondaries firm described Ardian's primary commitment to Mubadala II.

“$750 million to a sovereign wealth fund to go and invest for you? Doesn't that smack of trying to get money out of the door?”

Others have questioned the three layers of fees limited partners in ASF VII will bear, as Mubadala II will itself commit primary capital to funds.
  “Fees on fees? It's a good question,” Gombault says. “When you are looking at net returns, our investors are very happy.” 

Ardian seeks a 15 percent net internal rate of return and a multiple between 1.5x and 1.65x for its secondaries funds, according to Gombault.

Mubadala II will be mainly a co-investment vehicle that will use small fund commitments as a way to access more co-investment and direct investment opportunities.

It is understood that Mubadala II charges a management fee under 1 percent, with a carried interest of under 10 percent.

According to Ardian, the motivation behind the deal for Mubadala was obvious. The firm is bringing 20 high quality global LPs – including pension funds and other sovereign wealth funds – to Mubadala's table, many of whom may re-up into a subsequent blind pool if the fund performs well. “We were providing them the opportunity to do an easy fundraising for Fund III,” Gombault says. “It's giving [Mubadala] access to the best names in the world in terms of LPs.”

Even though its rivals are cautious, it's clear Ardian can capture some big-name LPs. North American pensions account for some of the largest investors in the firm's recent funds, with cheques of $300 million each from Ohio Public Employees Retirement System and CDPQ, and a $150 million ticket from Florida's State Board of Administration, according to PEI data. These groups had committed the same amounts to the firm's previous secondaries fund, suggesting Ardian still tops LP wishlists at a time when many investors are rationalising non-core relationships or, increasingly, going direct.

One pension taking the directs route is Public Sector Pension Investment Board, one of Canada's largest public pension funds.

“They're very good partners on the secondaries side,” says André Bourbonnais, PSP's chief executive and president, referring to Ardian and AlpInvest, where the pension also has secondaries commitments. He declines to discuss Ardian specifically.

Fixed income is offering dismal returns and public markets are subject to volatility and political shocks, so investors are looking for good returns with low risk. Ardian delivers just that, says one secondaries professional who spent almost a decade there.

The future for Ardian looks promising. As this issue went to press, the firm had raised $1.7 billion for its sophomore infrastructure secondaries fund, a record for the strategy, and was ploughing ahead with private debt and real estate offerings. 

 “You get bigger so you have to do bigger deals,” a secondaries veteran says of Ardian's investment strategy. “Does the music stop at some point, and when it does, does it hurt?”