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Strategically Speaking: Thriving on independence

“Our life at AXA was very good,” concedes Ardian’s Vincent Gombault, one year since the private equity firm completed its management buyout of a 52% stake from the insurance giant.

What is not to like about the backing of a globally-recognised institution – especially when that institution gives you all the freedom you could want? The two entities did not share a client-base and AXA Private Equity constituted all of the company’s expertise in private markets – two things that made the break easier. Technology infrastructure was the only shared resource – otherwise, it was independent in all but name.

But the name is pretty important. Part of the impetus for the spin-out was new insurance regulation – but more important was the recognition that the growth of third-party business was being held back by the AXA link.

“People in the market did not necessarily see that we were effectively independent,” says Gombault, head of the fund of funds and private debt vehicles that form the bulk of Ardian’s assets. “A lot of investors don’t like the idea of committing to ‘captive’ private equity fund managers and some that had been saying no to us for 10 years took the decision, the day after we became independent, to work with us. Even some of our existing clients have said that they can now commit more with us.” 

The results have been immediate, with the number of clients rising from 300 to 345 and assets under management surging 40%, to $50bn (€42bn). Of course, credit also has to go to the firm’s robust performance, which, as Gombault points out, is becoming more critical to survival in private equity. 

In the past, it was not unusual for a handful of people at an investment institution to manage 400 or more general partner (GP) relationships. Now, teams are cutting back to the 80 or 100 GPs that consistently deliver returns and co-investment opportunities – and committing three or five-times more capital with them. This is “a big change” that will continue to benefit Ardian’s direct LBO business, claims Gombault, but also its fund-of-funds outfit, which has long specialised in secondaries. 

Of the $14bn of new commitments gathered since independence, $8bn came into secondaries. During that time the firm bought $1bn-plus portfolios from the Pennsylvania Public School Employees’ Retirement Scheme, GE Capital and two sovereign wealth funds. Investors like these do not want to dump poor-quality funds or get hold of cash, but slim-down or re-shape their portfolios – Gombault says that more than 60% of Ardian’s transactions originate this way.   

“If you read all the commentary you would imagine that the big question in secondaries is, ‘What life will be left once the banks have no more private equity assets to sell?’” he explains. “But, that was never the real issue for us. We don’t think any discount can really compensate us for the risks associated with distressed assets, so we absolutely do not play that game. We prefer to pay a reasonable price to investors who need liquidity for good-quality assets.”

Limited partnerships now understand that they are being offered reasonable multiples

and IRRs on existing funds, and that it can

make sense to take that liquidity from the secondary market if it is long-term capital that can be recycled at better expected rates of return in new vintages.  

“In all other industries – from cars and yachts to stock and bond markets – the secondary market is more important and has much higher volumes than the primary,” says Gombault. “We think private equity is becoming an industry along those lines, like any other.”

Next to secondaries, private debt is an important source of growth. It currently accounts for less than 10% of client assets, but since independence three transactions have been completed, worth a total of €450m. These include €255m in subordinated finance for the management buyout and expansion of veterinary health company Ceva Santé Animale, and a €92 unitranche deal to help private equity firm Qualium Investissement acquire animal insemination group IMV Technologies from Pragma Capital. 

The latter is interesting as Ardian has been an important part of the backstory as a provider of debt: in 2010 it delivered the mezzanine financing for Pragma to buy IMV, and two years later it offered a new mezzanine tranche for IMV’s own buy-and-build of Polysem, the manufacturer of gloves for veterinarians. 

The move into private debt is clearly about moving into the space left by banks and CLOs in Europe’s lending markets. But the fact that Ardian has been in this game since 2005 reminds us there is more to it than this – and also that private equity firms, with their relationships across the world’s SMEs, have always been well-positioned to do this business. This is important, because building the teams to originate lending deals and the infrastructure to monitor them is easier said than done. 

Ardian tracks more than 900 GPs with its fund-of-funds database and will speak with them once a quarter about their portfolio companies. 

“That results in a huge database of more than 5,000 private companies around the world, each of which we know will be up for sale once every three or four years, because that’s what happens to private companies,” says Gombault – describing the kind of cycle IMV has been through. “The quality of our information, tracked over years, makes it easier to identify the 10 or 11 debt transactions we want to do each year with the new buyers.”

That insight is crucial in private debt investing, where even portfolios with a smattering of mezzanine deliver 6-9%, rather than the double digits of private equity. At those levels, with such concentrated portfolios, one deal gone bad can cause significant damage. 

The private debt capability is an example of how the link with a large parent institution provided both demand for, and an environment conducive to investing in a business line that now needs independence to thrive.

“AXA put a lot of money into this asset class, and into the business, but when we were captive AXA’s appetite for private debt was so high that it was keeping all of the dealflow we were seeing,” says Gombault. 

“With independence, we were able to say: ‘Thanks for being such a great client, but its simply too risky to have one part of our business entirely reliant on one investor’. AXA remains a large client but we have introduced a number of new third-party investors alongside them – and we will soon launch a new senior loans-only product in response to demand from some of those clients.”    

The strengths in secondaries and private debt, alongside developing capabilities in infrastructure equity, suggest that despite its first year of asset growth, Ardian is nurturing businesses that have a lot of capacity to grow further. Even in direct LBO, Gombault says that the firm’s excellent form in Europe has yet to be augmented by a real UK presence to match what it has already been established in secondaries and infrastructure. 

“I would not be surprised to see us double to $100bn over the next five years,” he says. “We want to do that without compromising quality and we have shown it can be done.”

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