Private equity firm expands in Canada amid secondary market booms

Ardian SAS opens a Montreal office, secures major pension fund deals, and bets on a booming secondary market

Private equity firm expands in Canada amid secondary market booms

Ardian SAS opened its first Canadian office in Montreal last October and quickly struck major deals with several of Canada’s largest pension funds, as reported by The Globe and Mail.

A logjam in private equity deals has helped the once-niche secondary market for buying and selling fund stakes explode in size. Ardian is betting this market will continue to boom, including in Canada. Its long-term goals in the country include opportunities for sustainable investments in renewable energy.

However, its primary focus has been catering to large investors looking to offload some of their private equity stakes amid a slowdown in dealmaking for all but the most desirable assets.

The secondary market for private investments allows fund investors to trade their stakes. In November, Ardian acquired a US$2.1bn portfolio of private equity fund investments from the Canada Pension Plan Investment Board (CPPIB).

In April, it purchased over US$1bn in stakes from British Columbia Investment Management Corp. (BCI).

Large pension funds seek new tools to manage their portfolios, especially as some found themselves overweight with private assets. Consequently, large institutional investors have sold stakes in illiquid private funds at a discount before those investments pay out to free up cash for other uses.

As the secondary market has surged past US$100bn 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 like real estate and infrastructure.

With interest rates beginning to decline – the Bank of Canada and European Central Bank both cut rates this week for the first time in years – private equity firms are optimistic that dealmaking will soon pick up. At the same time, Ardian expects the market for secondaries transactions to 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. “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?’”

Ardian manages US$165bn in assets, with almost 5 percent in Canada, and plans to expand its reach in the country. Ardian aims to invest in infrastructure and green energy, partnering with pension funds and other large investors focusing on green hydrogen technology.

At the same time, it remains a primary contact for Canadian investors in the secondary market.

Once considered a last resort, secondaries can still be an option for some underperforming funds. However, institutional investors now see the market as a useful, regular tool to manage large, complex portfolios.

This shift has added to what CPPIB chief executive officer John Graham calls a “spectrum of liquidity,” blurring the line between public and private market asset trading.

“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,” said Graham.

The pressure on fund managers to free up cash for distribution to their investors – who need money to meet commitments to new funds – is expected to drive more sales of private equity-owned companies this year. Despite this, 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 increased 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$35bn, Benedetti – a Canadian now based in New York, who oversees Ardian’s Montreal office – recalls predictions that it had peaked.

Instead, it continued to gain momentum, with a few dozen of the world’s largest institutional investors driving most of the growth.

Recently, secondaries have gone mainstream as private markets expand, and Benedetti predicts the market will reach US$300bn to US$500bn 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,” Benedetti said. “That group is going to feed the market for years to come.”