Deals target in fund V
Of LPs in fund V are new to Ardian
Alexandre Motte: Over the past year we’ve created a much stronger team for Co-Investment in New York in preparation for our investment period with the new fund. Now that we are managing a far bigger pool of capital in Fund V, we are going to be looking at a lot more deals in the US so we needed a more robust and formal structure, both to handle a bigger flow of deals and to liaise more closely with the major North American GPs we will be working with on transactions.
Patrick Kocsi: The idea of the new team structure is that we will work very closely with the Fund of Funds team in New York so that we can capitalize better on their excellent GP relationships and ensure we can look at opportunities quickly and efficiently. The structure now works in two parts. I head the Co-Investment deal execution team in the US and Daryl Li, Managing Director in the Fund of Funds team, heads a four-strong GP relations team for Co-Investment.
The reinforcement of the team has allowed us to industrialize our processes and accomodate a bigger deal flow.
A.M.: We have also replicated this structure in Europe with Ingmar Vallano and in Asia with Jan Philipp Schmitz, with separate deal execution and GP relations teams that bring Co-Investment and the Fund of Funds platform closer together. Before this, with previous generations of the fund, we always split our investments approximately evenly between Europe and the US, but we managed our US transactions from Paris with only junior staff in New York and more informal collaboration with the Fund of Funds team there.
P.K.: The way it now works is that when a GP calls us or we reach out to a GP about an investment, that communication initially runs through Daryl Li’s GP relations team, who will be speaking to the Investor Relations team on the GP’s side. Then, as we start working on a transaction, whether or not we end up pursuing it, the execution team take over the conversation on our side and start talking to the GP’s deal team about due diligence and so on. It’s a nice structure because it means the Co-Investment deal team doesn’t have to spend a lot of time on GP relationships, but can concentrate on due diligence and execution.
A.M.: It’s very noticeable that the flow of US opportunities that we’re seeing has increased since we put the new structure in place and started raising Fund V. There are several reasons for that. It’s partly because of the growth in our Fund of Funds business, which has roughly tripled in size in the period between raising Co-Investment Fund IV and our new fund. Also, now that we have a much bigger Co-Investment fund, we can look at much larger individual tickets, up to $150m or €150m each. That opens up areas of the market that we couldn’t touch with our previous funds, so we have a bigger set of transactions to choose from. And finally, now that we have Patrick and his team on the ground in New York, we can speak directly to more GPs at a senior level and that also makes a big difference.
P.K.: Overall our deal flow in the US was up about 50% year-on-year in 2018. Although the overall market for Buyout transactions in the US is very healthy, it didn’t grow by 50% last year, so you can see the effect of having a new team structure to invest a much larger fund.
As we have the potential to invest more than $1bn with US GPs, we need a full team on the ground with senior leaders.
A.M.: It’s also interesting that in Fund V, partly because we now have an expanded US Co-Investment team, we’ve received commitments from US LPs for the first time. Our investor base is still dominated by European LPs and a growing number from Asia, but now we are seeing real interest from US investors as well. Most of our investors choose to split their subscriptions evenly between our dollar and euro pockets, which reflects our broad intention for the fund. We will keep our investments roughly balanced between Europe and the US but we’ll also be pragmatic and look for the best opportunities.
P.K.: The fact we can now look at much larger transactions is a major change too. In Fund V we have already completed two deals of about $50m and we have one much bigger deal in progress. One of our main aims in strengthening the Co-Investment setup was to push up our average deal size and we’re seeing proof that it’s happening.
A.M.: Obviously, with a much larger fund investing in an expensive market, we receive questions from LPs about how we plan to deploy the money. The answer is that we are going to continue doing what has worked very well for us in previous funds: we concentrate on backing quality companies. Every business we have invested in is either number one or two in its niche, so we’re happy to pay for quality.
Before a $50m deal would have been extremely large and today thanks to our organization, it is an average amount.