Ardian closes new credit fund on EUR 5bn amid "ongoing bank retrenchment"

The GP's previous private credit vehicle held a final close in January 2020 on EUR 3bn, surpassing its EUR 2.5bn target. Fund IV was a third larger than its 2015-vintage predecessor, while Fund V has seen the GP grow the size of the vehicle by two thirds versus the previous vintage.

Asked why Ardian chose to raise a larger vehicle for its latest fund generation, Mark Brenke, managing director and head of private credit at Ardian, highlighted the continuing growth of the opportunity that it sees in the European private credit market.

"We have seen, and continue to see, significant ongoing bank retrenchment, so it's a market that is growing quite rapidly," he told Unquote. "This has driven our increasing fund size over the years, and has done since we started investing in private credit since 2005. We spent a lot of time thinking about the right size of platform for a new generation, taking into account what the best size is to execute this strategy over a typical three-year investment period while retaining a strong degree of selectivity."

Ardian has grown its private credit team by around 20%-25% over the past two years to account for the growth of the strategy, Brenke said. According to the press release, the strategy now has 24 investment professionals in London, Paris and Frankfurt, managing or advising more than USD 10bn in capital across its funds and managed investor mandates.

The GP raised its latest private credit fund in less than 12 months, according to the press release. This was in part down to the firm's track record, Brenke argues. "We are seeing increasing consolidation in the market, with investors flocking to funds with a long and strong track record across market cycles, evidencing restructuring skills and an ability to negotiate a more challenging environment," he said. "LPs are reducing the number of managers that they work with but not their total private credit deployment. This is part of why the fundraise was so quick and so successful."

Ardian Private Credit Fund is an Article 8 fund under the EU's SFDR, according to the press release.

The GP's historic default and loss rate has been "significantly below market rate", according to Brenke, which has encouraged LPs to back its funds. "From a market point of view, the next year or so will be more challenging than what we experienced in COVID, since government monetary and fiscal measures meant there was quite a quick bounce-back in a lot of sectors," he said. "Excluding the geopolitical risk of Ukraine and Russia, the inflationary drivers today are a consequence of the Covid measures, and the market needs to work through inflation and interest rate increase cycle."

In spite of the challenges, thinking ahead to 2023, Brenke sees a "very strong" outlook for European private credit. "Around 80-85% of our borrowers are PE-owned businesses, so our activity is heavily correlated to buyout activity," he said. "But even if the number of buyouts were in decline, I'd be confident that the overall number of deals done by private credit funds would increase as they have been taking a larger market share than banks, and we've been seeing this since the GFC."

Investors
According to the press release, Fund V maintained a high re-up rate while also adding 34 new investors out of its total 130 LPs. Its LP base includes insurance companies, pension funds, endowments, foundations and government agencies, hailing from 19 countries.

"I wouldn't say the LP base is vastly different from the last fund, but it has continued to diversity geographically," said Brenke. "Historically, our core investors have been in Europe, but we have branched out to Asia and North America. Private wealth has made up a larger share of the LP base this time, so this market is something we have continued to tap."

The geographic diversification has seen the firm add additional currency vehicles over successive fund generations, with the aim of bringing on board additional investors. "We added a sterling vehicle this time and have increased our share of UK investors, who want a diversified European exposure," Brenke said. "This vehicle has made it easier for UK investors to access the fund, while we take care of the foreign exchange hedging component."

Investments
Ardian Private Credit Fund V will target mid-market businesses with EBITDA of EUR/GBP 20m-50m, Brenke said. It will provide unitranche financing volumes of EUR/GBP 50m-200m per deal.

The unitranche lending product usually sees Ardian providing 100% of the debt in a deal, meaning that the structure is bilateral between the firm and the equity holder, Brenke said. "These are illiquid deals, and as a result, we can provide a lot of financing flexibility to the borrower, but we require a higher degree of control to provide that flexibility," he added.

The fund will aim to offer diversified exposure to the European market, according to Brenke, principally businesses based in France, the UK and the DACH region.

"We are highly selective and focus on businesses with highly visible, high recurring revenue streams," he said. "Although we are mainly business model-focused, this will be prevalent in B2B services, software, IT services, and financial services. We think those are business models that are relatively less cyclical compared with the broader economy, and they are generally less impacted by input inflation like energy, or wage inflation."

The fund has made 15 deals since it began its deployment at the start of 2022 and expects to make 40-45 over its investment period, versus the 30-35 made by its predecessor. While the team sources around 500 deals per year, it only transacts on around 20, Brenke said.

The impending downturn is on the firm's mind, Brenke said, but this will not lead to a deployment standstill. "The industry is concerned about the recession having a meaningful impact, but this does not mean that people will be on the side-lines and not deploying this – there are business models within that which will continue to provide opportunities," he said. "We have long term capital in our funds and our investors are, to a degree, paying us to look through the short-term volatility to lock in the longer term risk-adjusted returns. And our returns are generally increasing, given that we have floating base rates."

People
Ardian – Mark Brenke (managing director, head of private credit).

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