Side Letter: Ex-Ardian boss’s warning; Apollo’s flexible capital; Arlington’s $3.5bn

A former top Ardian executive says secondaries deals done over the last three years are in for a rude awakening. Plus: Apollo's flexible capital raise and Arlington Capital Partners seeks as much as $3.5 billion. Here's today's brief, for our valued subscribers only.

Just happened

Secondary effects of Ukrainian war
The secondaries market will feel the negative impacts of the invasion of Ukraine though a gradual onset, according to former Ardian boss Vincent Gombault (pictured). In a quarterly newsletter seen by Side Letter, the ex-fund of funds and private debt head writes:

  • Many secondaries funds have benefited from buying high-quality assets, which exited into an environment where valuation multiples were rising. High inflation, rising rates and low growth will likely depress multiples, hitting the performance of deals.
  • Deals done in the last three years, when enterprise value-to-EBITDA ratios have been at record levels of more than 11x, will be the worst affected. Buyers that splurged last year could regret it. “It would have required discipline from seasoned secondary managers to take extra caution and to spread their investment risk across several years.”
  • The average net debt-to-EBITDA multiple for private equity-backed companies stood at 6x at the end of 2021, the joint-highest level (along with last year) since 2007. High debt levels will further amplify any decreases in equity value and could cause portfolio companies to breach covenants.
  • The negative impact will be slow, rather than sudden; buyout managers only report quarterly and secondaries funds don’t price in all new information at once. While the market will bounce back, for the next 18 months or so, “market turbulence will ripple through the industry, slowing fundraisings, exposing poor transactions and testing the capability of investment teams”.

Why this matters: this analysis from an investing veteran is a blow to the secondaries market, which is coming off a record year.

Apollo’s latest raise
Apollo Global Management said yesterday it had closed its second Hybrid Value Fund on around $4.6 billion. The strategy, which employs a mix of debt and equity, raised more than 40 percent over its 2018-vintage predecessor. More than $1 billion of HVF II has already been committed, including preferred equity investments in chemicals firm WR Grace and video game company Behavior Interactive. What the fund can buy appears to be pretty flexible: our colleagues at Secondaries Investor reported last year (registration required) that capital from the programme has been used to back an equity continuation fund process involving Alpine Investors.


Arlington’s April ambition
Arlington Capital Partners is planning an initial close on its latest flagship fund later this month, documents prepared for Arkansas Teachers Retirement System‘s 4 April board meeting show. Arlington Capital Partners VI has a $3.5 billion hard-cap and plans to buy quality companies at as much as 30 percent below market value, the documents show. Arlington’s non-core deals have generated an average 2.6x gross ROI.

Behind AXA IM’s latest fund launch
International expansion will be key to AXA Investment Managers Alts‘ just-launched healthcare impact strategy, our colleagues at New Private Markets report (registration required). The unit, which is part of French insurance giant AXA Group, said Monday it was seeking $500 million for a healthcare impact strategy to reduce barriers to accessing healthcare in mid- and low-income countries. Parent AXA is backing the fund to the tune of $200 million and the vehicle will seek returns of between 20 and 25 percent.

“We have to be convinced that the problem being addressed is a global problem – that it doesn’t only exist in certain markets,” Jonathan Dean, head of impact investing at AXA IM, tells NPM. “We have to see very specific product characteristics that will lend themselves to international expansion and be accessible in mid- and low-income countries. That’s where we measure our impact.”

Dig Deeper

Institution: Arizona Public Safety Personnel Retirement SystemHeadquarters: Phoenix, USAUM: $17.4 billionAllocation to alternatives: 32.54%

Arizona Public Safety Personnel Retirement System approved a $50 million commitment to Tritium III at its March board of trustees meeting, a contact at the pension confirmed to Private Equity International.

Tritium Partners launched its third private equity vehicle in September to invest in North America.

Arizona PSPRS allocates $2.17 billion to private equity investments, comprising 12.46 percent of its total investment portfolio. The pension’s recent private equity commitments have focused on buyout and venture capital vehicles in the North America and Asia-Pacific regions.

For more information on Arizona Public Safety Personnel Retirement System, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Adam LeRod JamesCarmela Mendoza