A logjam in private equity deals has helped the once-niche secondary market for buying and selling stakes in funds explode in size, and France-based Ardian SAS is betting that market will continue to boom – including in Canada.
Ardian opened its first Canadian office in Montreal last October and has wasted no time striking major deals with some of Canada’s largest pension funds. Its longer-term ambitions in the country revolve in part around opportunities for sustainable investments in renewable energy.
But its biggest line of business so far has been catering to the demand from big investors looking to offload some of their private equity stakes at a time when dealmaking for all but the most desirable assets has slowed to a crawl.
The secondaries market for private investments gives fund investors a way to trade their stakes. In November, Ardian bought a US$2.1-billion portfolio of private equity fund investments from Canada Pension Plan Investment Board (CPPIB), then scooped up more than US$1-billion of stakes from British Columbia Investment Management Corp. (BCI) in April.
Large pension funds have been eager to find new tools to help manage their portfolios, especially as some found they were overweight with private assets. As a result, large institutional investors have been willing to sell stakes in illiquid private funds at a discount before those investments pay out as a way of freeing up cash to use elsewhere.
As the secondary market has taken off, surging past US$100-billion in annual transaction volume globally, Ardian has emerged as a specialist and one of the largest secondaries players, alongside its investments in buyouts, credit and real assets such as real estate and infrastructure.
With interest rates starting to edge downward from high levels – the Bank of Canada and European Central Bank both slashed rates this week for the first time in years – there is rising optimism among private equity firms that dealmaking will soon pick up. At the same time, Ardian expects that the market for secondaries transactions will keep growing.
“The market has just exploded in size, the pie has gotten a lot bigger,” said Mark Benedetti, co-head of Ardian’s North American business, in an interview. “A lot of groups like pension plans and sovereign wealth funds have said, ‘Why can’t I dynamically manage my [private equity] portfolio like I would my stock portfolio or my bond portfolio?’ ”
In total, Ardian manages US$165-billion of assets, of which almost 5 per cent is in Canada, with plans to expand its reach in the country. Ardian is looking at making infrastructure and green energy investments, partnering with pension funds and other large investors with a keen eye on green hydrogen technology. At the same time, it is likely to remain one of the first calls for Canadian investors tapping the secondary market.
It used to be that secondaries were seen as an option of last resort – and that can still be the case for some underperforming funds. But the way institutional investors approach the market has changed. It is now considered by many to be a useful, regular tool to manage large, complex portfolios. That has added to what CPPIB chief executive office John Graham called a “spectrum of liquidity,” blurring the once-sharp distinction between the way assets trade in public and private markets.
“Liquid markets aren’t as liquid as they used to be … and there’s pockets of liquidity in the private markets. And so this black-and-white view of the world of liquidity, we’re kind of past it,” Mr. Graham said in a recent interview.
The intense pressure that has built up for fund managers to free up cash that they can distribute to their investors – who, in turn, need money to meet commitments they’ve made to new funds – is expected to drive more sales of private equity-owned companies this year. Even so, the secondary market is likely to remain popular.
“I certainly think it’s here to stay,” said Matthew T. Simpson, co-chair of the private equity practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, a Boston-based law firm that has also ramped up its presence in Canada. “Sponsors … have found new tools and new toys to play with in a fun, exciting way. It’s no longer the escape route, it’s not the ejection seat.”
A decade ago, when the secondaries market reached US$35-billion, Mr. Benedetti – a Canadian now based in New York, who oversees Ardian’s Montreal office – recalls plenty of predictions that it had peaked. Instead, it continued to gain momentum, with a few dozen of the world’s largest institutional investors accounting for most of the growth.
More recently, secondaries have been going mainstream as private markets continue to expand, and Mr. Benedetti predicts the market will reach US$300-billion to US$500-billion in the near term, and become much larger over time.
“What’s interesting is, last year, more than half of the sellers of secondary deals, it was their first time selling,” Mr. Benedetti said. “That group is going to feed the market for years to come.”