Ardian Private Credit accelerates as European banks retrench

Ardian Private Credit is on course to start raising its sixth-generation fund in 2024 as the gradual withdrawal of European banks from the leveraged loans market strengthens the position of the Continent’s largest private credit providers.

The Private Credit team made their first investments in Fund V in late 2021 and has completed 20 deals. The fund had its final close at €4bn in October 2022 and, together with co-investment capacity and accounts managed by Ardian Customized Solutions, represents at platform of ca €5bn.

The investment period for Fund V has coincided with an acceleration in bank retrenchment across Europe, thanks to heightened economic uncertainty and Russia’s invasion of Ukraine. This has led to increased demand for non-bank finance, particularly for leveraged buyouts.

Private Credit gains market share

“We are seeing excellent deal flow, including some larger companies that would previously have taken bank debt but are now seeking alternative finance as banks pull back from the market. That’s an important change in the market,” said Mark Brenke, Head of Private Credit.

“As a result, we and other private credit providers are seeing our market share increase and we believe this is a long-term trend that has further to run. We believe that a growing number of high-quality borrowers will turn to private credit providers over the coming years.”

Alongside bank retrenchment, Brenke said the team’s deployment had also benefited from the increasing amount of financing it has provided to companies already in its portfolio, through follow-on deals and additional credit lines for M&A.

“Over the past five years, our portfolio financing activities have continued to increase so that on average today around 30% to 40% of our activity originates from our existing portfolio. That provides us with an attractive flow of repeat business and a good base for increased deployment in the future.”

A growing investment team

Ardian Private Credit has increased the size of its investment team by more than a fifth since the beginning of 2022, positioning it to benefit as Europe’s private credit market continues to expand.

The team operates from bases in Paris, London and Frankfurt but in recent years has widened its focus and now has dedicated teams focusing on the Benelux countries and Scandinavia, which are covered from the existing three-office network. It is also examining opportunities in Southern Europe and did its first deal in Spain at the end of 2022.

The Private Credit team lends predominantly across the senior layers of the capital structure as well as a smaller number of junior debt transactions. It is a leading provider of so-called unitranche funding packages, which are often used to finance leveraged buyouts.

Deals are fully covenanted and provide Ardian with a high degree of control, normally as the sole lender. The investment team frequently takes an observer seat on the borrower’s board, allowing close monitoring of business performance and enabling the team to operate as an effective partner in executing the borrower’s growth strategy, often via follow-on acquisition lines agreed as part of the original transaction.

The Private Credit team focuses on the highest quality LBO borrowers: companies with resilient business models that have good visibility on future cash flows, thanks to subscription-based business models, for example. It favors companies operating in relatively non-cyclical sectors, such as B2B software-as-a-service provides, because they are relatively well insulated against any economic slowdown.

Proven risk management and high selectivity

Ardian Private Credit was launched in 2005 and performed successfully through the financial crisis of 2008-09 and subsequent periods of volatility. Today, Ardian is among the biggest private credit managers in Europe and is a major beneficiary of the trend among investors to consolidate their allocations with a smaller group of large asset managers that have the longest performance records.

“This is a testament to our cautious, disciplined investment strategy, which looks for high-quality businesses with stable cash flows.”

“2022 was an extremely busy year for us. Our deal flow increased significantly which meant we could be very selective about the transactions we agreed. And just as importantly, even though the economic environment was not straightforward, our portfolios have been very robust. They performed very well during Covid, and they are performing very well now. Obviously, we monitor every borrower very closely to make sure they stay on track."

Sustainability is fully integrated

Ardian Private Credit Fund V operates fully in line with Ardian’s overall sustainability strategy, and is certified as an Article 8 fund, meaning that it integrates ESG criteria throughout the investment process and holding period.

The investment team has agreed a number of transactions with private equity-backed borrowers that include interest rate ratchets. These include a mechanism through which the borrower can earn a reduction in the coupon on their loan provided that they achieve certain ESG-linked targets that are agreed as part of the financing deal.