- Use of leverage depends on debt level of each portfolio firm
- Not seeing inflation in secondaries market
- Sees a number of large transactions in H2 2017
Benoît Verbrugghe is head of the New York office of Ardian, a fund-of-funds and one of the biggest secondary buyers.
Ardian recently sold a significant chunk of its PE portfolio. Why was it the right time to sell?
You have to be proactive. … Some GPs are taking more time to sell their remaining companies, and since we are fund-of-funds managers, we don’t really have the full power to activate the sell. For some managers, we think it’s good to crystallize returns instead of waiting. For some specific funds we were already able to get a nice performance, and so the arbitrage between waiting two or three years or activating a sale for some specific funds that we have in the portfolio was certainly the solution. And based on that we said, “OK, let’s gather portfolio funds where we know that we don’t have so many upsides left. We have already a very nice multiple on those funds. That could be interesting for some specific buyer on the secondaries market.” That’s really again the proactive management of the investments that we have in our funds.
Is the use of leverage still a big part of the strategy in buying portfolios?
That’s a question that we ask on a regular basis. We have always considered the use of leverage if we can — I repeat, if we can — for specific transactions. It’s not an automatic decision, it’s not for all transactions, but it’s true that for the last 15 years we’ve been using leverage if we think that the profile of the transaction makes it acceptable.
First we need to take a look at every underlying company to check the level of debt. At the end of the day, if we consider that the leverage at the fund level is too high, then we don’t put more leverage. Then we again consider the level of liquidity in the next two to three years. We speak about maturity: if we think that 50 or 60 percent of our portfolio will be exited over the next 18 months, will have liquidity, then we say, “Okay, instead of putting 100 percent of equity, maybe we can put 30 percent of debt and 70 percent of equity.” You can consider that your debts will be reimbursed quite quickly; that’s why the maturity is very important to adjust the level of the debt.
For us it has always been the case that a deep analysis must be done before any use of leverage, and we have to be in a position to do a transaction even without leverage. Our investment committee always votes on a transaction without leverage. If the transaction without leverage is acceptable, then given the maturity of the transaction, given the profile of the transaction, we could add some leverage. It’s case by case.
What is pricing like these days? Still high?
Every transaction is unique, every transaction has a specific component. And especially for the ones we are bidding on, i.e. large and complex transactions, of course the price is important for the sellers, but another key component is execution. Today, if you are about to complete a large and complex transaction, of course the seller will try to maximize the price. But more important is the ability to find a buyer that can offer a global solution, so that the seller can transfer it with a high level of success, and possibly find a solution for the team that’s in place.
Who is selling in the secondaries market, and why?
[The market] is a tool for any type of investor to manage actively a private equity portfolio. That’s why today you can find any type of seller — such as pension funds, sovereign funds, family offices, insurance companies, any type of large institutions that are invested in private equity, that have large portfolios — they are using the secondaries market to rationalize their portfolio and to crystallize returns.
In addition, you have as well the transactions that we call GP restructuring or tender offers, where for specific funds, specific vintages, some of the GPs now are offering a liquidity option for their LPs to get out of the fund and to get liquidity a little bit early. That’s quite an important part of the market today, where you find these types of transactions in the U.S. and Europe mainly.
What’s the outlook for the rest of the year?
During the second half of 2017, you will see a number of large transactions coming from the players I have mentioned, of $500 million, $750 million, $1 billion. So the market will be quite active. Altogether, we believe in terms of volume we are looking at $35 to $40 billion.