AFIC wants pension reform for more LBOs

A number of key participants in French private equity, co-ordinated by the French venture capital association (AFIC), have come together to look at ways to develop the country’s leveraged buyout (LBO) deal activity.

The initiative was established in October 2001 to explore ways of bringing about an increase in LBO activity to levels seen in the US and UK. According to Jean Louis de Bernady of Activa Capital “The working group comprises lawyers, auditors and investors who set out to analyse all legal, fiscal and administrative difficulties for the French LBO market.”

AFIC is keen to encourage French LBO activity across a number of fronts. It sees the pension fund systems of the US and the UK as one of the cornerstones of Anglo-Saxon LBO activity and AFIC therefore argues that reform to the French pension savings system will serve as a much-needed catalyst. AFIC reports that some ten per cent of all pension fund commitments in the US and UK are invested in non-listed companies and the association hopes that a broad reform of the French pension fund system will provide a boost for similar levels of private capital investment in France.

The association also wants to see a relaxation of the regulations on domestic insurance fund investment in private equity funds, which it sees as a factor influencing the smaller size of French PE funds than those raised in the US and UK. It is also proposing an increase in the availability of fund of funds opportunities to investors. The association believes that the composite structure of an FoF will help reduce investor exposure whilst serving as a useful point of entry to higher level returns that are achievable through private equity.

To date, French institutions have underinvested in private equity funds when compared with their other European and US counterparts. Only ten per cent of private equity capital raised for investment in France originates from French investors. The LBO White Paper, published earlier this month by AFIC, is looking at ways to increase this to around 25 per cent. “The main difficulty for French LBO is that it is a relatively recent phenomenon that has come about in a tax environment that was prohibitive,” says de Bernady. “We are seeking to adapt the current rules to benefit investors.”

LBO activity emerged in France during the mid-1980s and now there have been as many as 300 LBOs each year, with deal values increasing year-on-year as the recent E3.7bn acquisition of Legrand by US private equity firm Kohlberg Kravis Roberts will testify, a deal in which the French involvement came not from a private equity house but from Wendel Investissments, a holding company of CIGP. More importantly for investors, the French LBO market is likely to be one of the key locations in Europe over the coming years. Last week saw the sale by France Telecom of its majority interest in Télédiffusion de France to a consortium of Charterhouse Development Capital, CDC IXIS and Caisse des Dépôts in a deal that was valued at around E2.9bn. Lionel Giacomotto, who worked on the TDF deal for Charterhouse said he anticipated a significant increase in French buyout activity as a result of debt problems for many of France’s biggest corporations. “We expect to see a lot of activity in the French market, particularly among the former state-owned conglomerates as they look to streamline their activity to reduce large debt piles accumulated over the past decade.”

In addition to France Telecom which is currently looking to reduce its E63bn debt mountain, Vivendi is in the process of disentangling its vast array of operations, with recent disposals including the sale of Vivendi Publishing to Cinven, Apax and Carlyle Group for E1.2bn. Rob Rosner, European president of Vestar Capital Partners, which established its first European offices in Paris and Milan in 2001, described the divestment of non-core assets by the large French groups as the firm’s 'single largest source of deal flow in Europe'.

The Legrand deal is indicative of France’s comparatively low level of internal activity. Although most European buyout firms are not geared towards taking on a deal of this magnitude, there are very few French buyout firms that could have made it to the negotiating table. Paribas Affaires Industrielles, which has just closed a E1.8bn buyout fund (PAI III), was the only French private equity firm to enter the Legrand auction, teaming up with CVC Capital Partners to table a bid for the electronics components company.

Following the White Paper, the AFIC working group intends to discuss its proposals with the French government. One source said that whilst the government had no real incentive to relax the tax regulations for French investors, it had good reasons to see an increase in local investment in French industry. AFIC is also keen to promote the inclusion of French employees in buyout activity. The white paper concludes that current regulations make employee involvement overly complicated and that French rules need to be brought more into line with the European norm to incentivise employee participation in buyouts.