Ardian's Jason Yao: the $19bn programme that proves the secondary market is coming of age

In these days of heightened volatility, it’s all about safety. The recent $19bn Ardian programme showed that investors are willing to pay handsomely for a solid track record

Ardian, a world leading private investment house, this month announced that its eighth-generation secondaries platform attracted a record US$19 billion of commitments from investors globally.

With particularly strong growth in Asia, where attitudes towards secondaries funds is developing strongly, the Ardian platform attracted 275 investors from nearly 40 countries.

The programme, which included US$5 billion of co-investment interests, significantly exceeded the US$14 billion raised for Ardian’s seventh generation platform in 2016.

Investors comprised major pension funds, sovereign wealth funds, insurance companies, HNWIs and financial institutions.

The fundraise highlighted how the secondaries market has matured to become an important source of liquidity for investors, including insurance companies, pension funds and family offices.

FinanceAsia spoke with Jason Yao, Managing Director and Head of Ardian Greater China, who told us how demand for the asset class was continuing to grow rapidly in Asia

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Q: Can you tell us a bit about your background in Ardian and the background of the investment house?

A: I joined Ardian in 2010 from the Singapore office which was set up in 2005. All activities in Asia come from the Singapore base and I moved to Beijing at the end of 2012 just before we officially opened at the beginning of 2013. That’s when we started to recruit people and started to look for opportunities on the ground.

I’ve been with Ardian almost 10 years. Before that I was with McKinsey as a consultant.

Ardian is a relatively new brand. We were founded by Dominique Senequier back in 1996 but previously it was called AXA Private Equity. Back then we were under the AXA umbrella, and we were 100% owned by the AXA Group. In 2013, we did an MBO (management buyout) so we were fully independent from AXA and we rebranded ourselves Ardian.

In terms of our investment strategy, now we have five pillars.

The biggest one is the fund of funds platform which is the secondary platform. The other four pillars are buy out, infrastructure, real estate and credit. So that’s the other four direct activities, but today we’re focusing more on the fund of funds platform and as you’ve seen we just closed this $19 billion secondary fund.

We started the secondary practice in 1998 about three years after the establishment of the whole Ardian program.

So that’s equal to 22 years’ experience in this field across eight generations of funds. Currently in the fund of funds program we managed about $53 billion out of the $96 billion of the whole group. So we’re a multi-strategy European-based asset manager and I think globally people are more familiar with our secondary practice.

Because the investment activity is global and we do a lot of issuances in Asia as well. We have four offices in Asia - Singapore is the first one, Beijing is the second one . In 2018/19 we opened two offices, one in Seoul and the other one in Tokyo. Currently we have four offices in the Asia region.

Q: What was your strategy with this latest secondary programme and can you tell us a little a bit about the current situation with s the secondary market?

A: Overall the secondary markets, compared with traditional buy out strategies, have been seen as a sort of niche strategy. However, we have more than 20 years’ history with it and I think the market here is maturing after so many years of development. Compared with 10 years ago when I joined, the secondary market in terms of the volume value has increased significantly - institutions such as pension funds, insurers, endowments and sovereign wealth funds, they’re more familiar with secondary markets.

As with any secondary market, whether it’s commodities, whether it’s gold, every financial product needs a secondary market. For LP (limited partnership) interest, there was no secondary market 25 years ago but it’s gradually grown bigger and bigger and people have started to become aware of the value of the secondary market.

On top of that, I think people in the early days were investing in a lot of PE funds and after 10 years they realized they were getting stuck in their portfolios - they couldn’t easily get their invested liquidity back. For a lot of  LPs, they came to realise they were getting more and more value from the secondary market where they can get their cash back quickly.

There’s a lot of reasons why LPs want to sell too, especially since nowadays people use the secondary market more frequently. The reasons to sell are, for example, a change of regulation or a change in their internal compliance rules. A lot of insurers, for instance,  have a regulation that they cannot invest more than 3% in PE so when the asset value of the PE investment goes above 3% - and maybe that’s because the public portion has decreased significantly which forces the PE portion above 3% - they will have to come to the market to sell the portfolio to comply with the rules.

Also there are times when the LP is changing strategy and they want to get their cash back and do something else. Some of the LPs are very focused on LP investments and so they change strategy to become a true direct dealer – they want to do direct deals. They then sell their fund portion, get their cash back for their direct investments.

Accounting rules is another area as well.  A lot of investors, for instance, cannot record their gains - they can only record their gains when they get the cash back. In these circumstances, maybe towards the end of the year, some institutions wants to book their income and they will start to sell some of their funds which are already making money so they can record their annual profit.

So there are a lot of different reasons for using the secondary market. A need arises and people didn’t know there was a secondary market that can be used as a tool to make these sorts of things happen. It’s an education – it’s taken a bit of time but it’s definitely globalizing and is a maturing market. It’s not now regarded as something niche – people use it as part of their normal strategies. When there is a need they will come to market.

Q: What about the situation in Asia?

A: In Asia, the secondary strategy is relatively new. For example for our eighth generation fund, about 20% were Asian investors – it was a significant increase. A secondary strategy adds a good mix to their portfolios because the nature of secondary funds is very different to traditional PE funds – the cash efficiency or cash back is much quicker and because you buy at a discount, you don’t have so much J-curve in your account. You have a day-one gain on your account in fact. So it mitigates the traditional PE funds which is J-curve cash back after 5 years - it’s a good combination for their portfolio construction.

A lot of secondary players are setting up offices like us in Beijing. Since 2013, we expanded the team and we have more people speaking the local language joining the firm. With this expansion, we are increasing the connection with the local investors as well. We have much more of an exchange with local LPs and now they are getting very familiar with this product.

When we come to market we speak to local LPs and we feel they are ready. They are very professional and they know the product very well – they know the right questions to ask and the way to select good managers for their strategies.

People are becoming much more serious here, not only as an investor in secondary products but also sometimes as a seller. For example, we did a large transaction last year - $5 billion - with an Asian seller which is the largest secondary deal in secondary history and that’s from an Asian seller.

We also did a couple of deals in the Greater China region from a Taiwan seller and a HK seller. The markets  are using this secondary market to rebalance their portfolios.

Q: Has the COVID-19 crisis had a big impact on the secondary market?

A: For fundraising, quite honestly a lot of the LPs already had started their work at the end of last year before the crisis hit so it was already in process. But we have had a number of LPs in process during the coronavirus which maybe slowed down the process. Initially we were worried they would not be able to catch our timeline because of the pandemic – it’s perfectly understandable.

But in the end the results have been very good I think. This shows the confidence of the LPs towards the secondary strategy especially there if there Is uncertainty in the market which also creates a lot of opportunity.

Some of the LPs are very confident that it’s a good time to launch a secondary product because when there’s uncertainty and less liquidity people are sometimes forced to sell or sometimes they’re more pressured or more eager to rebalance their portfolio. It creates a lot of new opportunities so it’s great timing.

Q: How do you see the secondary market in five years’ time?

For Ardian, we do all-weather solutions and as I mentioned the secondary market is a mature market. It’s like the stock market. At all times people are making money on the secondary market so it’s not like something you’re playing on timing. Especially for a fund like us we don’t play on timing. We have this all-weather solution which is to partner with the large LPs when they have need fa solution. They may need a change of strategy, they need these new arrangements or they may want to issues certain products - they will have a lot of needs and they need a solution-provider and this solution needs to be a one-stop solution.

Over the next five years, we aim to be very close to the LPs. If we look at the last five years, the total value of the secondary market is growing so we expect it to continue to grow. Over the past five years there’s been a significant increase in PE valuation so we are seeing a lot of increase in the portion of their strategy towards the PE. In 4-5 years when they want to sell it will be a bigger pie as well. We are very confident that, in the future, this market will continue to be profitable and will grow. For us? We aim to have larger funds and do larger deals with larger LPs.

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