BCI Sells $1-Billion of Private Equity Holdings to Ardian

James Bradshaw of the Globe and Mail reports B.C. pension fund manager sells $1-billion of private equity holdings to French buyout firm Ardian:

British Columbia Investment Management Corp. is selling more than US$1-billion of stakes in private equity funds to French buyout firm Ardian SAS, tapping the secondaries market for private assets to free up cash for new investments.

A spokesperson for Ardian confirmed the transaction, but declined to comment further. A spokesperson for BCI declined to comment. Neither Ardian nor BCI disclosed which of BCI’s private-equity holdings are changing hands in the transaction.

The transaction between BCI and Ardian was first reported by Bloomberg News.

BCI regularly sells its interest in funds in secondaries markets, which allows the $233-billion pension fund manager to rebalance the size of its private equity portfolio relative to the rest of its assets, and to redeploy capital to new investments.

The secondaries market for private investments allows fund investors – the limited partners that pledge money to a fund managed by a general partner, and share in its returns – to buy and sell stakes in illiquid funds before those investments are realized, usually at a discount. That has become an increasingly important tool for large institutional investors to create liquidity from some of the private assets they own. As high interest rates have driven up borrowing costs and depressed company valuations, institutional investors are looking for ways to free up cash without waiting for the backlog of stalled private equity deals to clear.

Major Canadian pension funds have regularly tested the market for secondaries in recent years, but the greater clarity around the path of interest rates – and the prospect of possible rate cuts from central banks starting later this year – has more recently made it easier for buyers and sellers to agree on prices.

BCI’s private equity portfolio was worth $28.3-billion, and accounted for about 13 per cent of the pension fund’s total assets as of March 31, 2023. That was up from 11.8 per cent a year earlier. BCI has yet to report financial results for its latest fiscal year, which ended in March.

Ardian opened an office in Montreal last year in an effort to increase its investing in the country, particularly in sectors such as renewable energy. It is one of the most active and prominent players in secondaries, and last year purchased a US$2.1-billion portfolio of private equity fund stakes from the Canada Pension Plan Investment Board, which included commitments to fund managers stretching back as long as 20 years.

Last September, the Caisse de dépôt et placement du Québec turned to the secondaries market to sell a portfolio of partial stakes in funds and co-investments for US$1-billion to Swiss private equity company Partners Group Holding AG.

BCI is the latest large Canadian pension fund to sell private equity fund stakes in the secondaries market. 

Selling US$1 billion in PE holdings in a portfolio of CAD $28 billion is fairly sizable, representing 5% of the total PE portfolio, but both CDPQ and CPP Investments have also sold sizable PE holdings over the last year in the secondaries market (as have others).

Why is BCI selling some of its PE holdings?

As this article states, this move allows BCI to rebalance the size of its private equity portfolio relative to the rest of its assets and to redeploy capital to new investments.

It also allows for vintage year diversification because clearly some vintage years will be better than others as the market for private equity slows due to higher rates for longer, higher labour costs and a poor exit environment.

I recently discussed all this when I went over why CPP Investments plans to double its credit holdings over the next five years:

Now we read that CPP Investments is going to nearly double the size of its credit holdings over the next five years, and it’s counting on an upturn in leveraged buyouts to generate some of that growth.

Is this possible? Aren't leveraged buyouts in the doldrums?

Today, Toby Nangle of the Financial Times published these comments on PE's winter

It’s amazing to think quite how recently private capital management was a pretty-much-nothing industry. Back in 2003, the entire sector’s AUM was less than $500bn. That’s around a quarter of an Nvidia or a single SPDR S&P 500 ETF

Things have changed

Along the way, Blackstone overtook BlackRock to become the most valuable asset management firm and the private market explosion brought riches to many many managers, as well as prompting a growing political backlash. 

But, as readers know, not all is hunky-dory in PE-land. Exit values are down 66 per cent from their 2021 peak. In 2023, 38 per cent fewer buyout funds closed, and deal values have fallen by 60 per cent over the past two years. 

With public markets surging and the US steadfastly refusing to enter recession, what’s been going on? The short answer is that higher bond yields have clogged up the PE pipeline. Bain & Co’s latest private equity review gives a longer answer. This was expertly covered in MainFT upon release, but we thought we’d take the chart-curious through an extended parsing of the report.

Take the time to read Bain & Co's Global Private Equity Report 2024 here.

Here are some of the highlights:

Clearly higher rates have led to lower deal activity and lower exit values but if rates stabilize and inflation comes down, conditions are ripe for a pickup in activity.

Thus far, it's a tough slug. Just read Roula Khalaf's FT article on how Princeton endowment chief sees ‘worst ever’ private equity liquidity:

Princeton University’s endowment, known for its aggressive bets on private equity, is facing the “worst ever environment” for liquidity in the asset class as a slump in dealmaking and public listings weighs on returns, according to its outgoing chief investment officer. 

“Until the last few weeks, I have seen very little liquidity coming out of the private equity and venture capital space,” said Andrew Golden in an interview with the Financial Times. “We have seen some potential thawing more recently, but we can’t be sure whether or not that’s really a start of a new trend or if that’s just a blip.” 

Signs of improving liquidity “can sometimes just be a head fake”, he said, “that doesn’t mean it’s necessarily going to continue.” 

Golden will retire in June after almost 30 years running one of the world’s largest endowments, where he now oversees a $34bn portfolio. 

 His remarks came after the Princeton University Investment Company suffered a 1.7 per cent loss last year, a product mainly of private equity underperformance, after growing by almost 10 times since he took office in 1995.

Where am I going with this? Quite simply, we need to start seeing a pickup in M&A and private equity activity for CPP Investments' to double the size of its credit holdings over the next five years, and unless we see an upturn in leveraged buyouts to generate some of that growth, that target will not be achieved.

It's very difficult to predict what we will happen with inflation and rates over the next year or two, so the best course of action for all pension funds is to remain very diversified both across asset classes and within them, and very liquid.

Jim Pittman, the head of Private Equity at BCI, knows all this and is prepping the portfolio for opportunities that will arise as the market dislocations occur over the next two years.

He also understands what staying liquid, focused and agile in private equity is all about. 

All this to say, while the dollar figure seems high, selling US$1 billion in PE holdings for BCI, CDPQ and especially for CPP Investments is manageable, all part of shoring up liquidity and diversifying vintage year and other risks.

But to do this properly, you need a great partner, and that's where Ardian comes in.

Below, founder and CEO Dominique Senequier shares personal thoughts and anecdotes from Ardian’s first decade: the factors that explain the company’s success, the achievements that make her most proud – and the doubters she proved wrong.

Also, listen to Dominique Senequier discuss how private equity is adapting to a new macroeconomic reality (IPEM, September 2023).

Ardian is a very impressive fund and great partner to BCI and other Canadian pension funds, not just in private equity but also in real estate, infrastructure and private credit where they're growing their operations.

Lastly, watch Kunal Shah, Managing Director and Head of Private Markets at iCapital discuss private equity secondaries with Anastasia Amoroso, CIO of iCapital, for the inaugural episode of Beyond 60/40 (May, 2023). Learn how private equity secondaries may enhance portfolio diversification and reduce certain risks associated with investing in a primary fund.