Briefing: France's winners and losers

As France gradually settles down after a year rich in political and economic drama, its private equity industry is seeing signs of life again. But the resulting recovery is likely to see winners and losers

For most French GPs, 2012 was a year to forget. The industry was dragged into a protracted row about taxation, while the economy suffered due to the ongoing crisis in the Eurozone. This took a heavy toll on activity: buyout deals totalled just €6.1 billion last year, less than half the €15.2 billion figure for 2011, according to mergermarket. 

The good news is that dealflow seems to be picking up again; at press time, rumours were circulating about a possible €3.5 billion buyout of Elior, a French catering company, in what would be the largest takeover in continental Europe since the collapse of Lehman Brothers. Credit availability also seems to be improving, helped by a boom in high yield bond issuance at the higher end and a better range of lending options in the mid-market.   

And yet many challenges remain: financing remains selective, pricing is still an issue, and sourcing deals is much harder than it used to be. And crucially for the industry’s medium-term future, the fundraising markets remain closed to many GPs. “I call it our own Death Valley: a part of the French private equity industry is dying of thirst because few French institutions invest in it,” says Louis Godron, chairman of AFIC, the French private equity association. 

This year is unlikely to be as bad as the last. But as Stéphane Davin, a partner at Baker & McKenzie’s Paris office, puts it: “Nobody imagines that 2013 will be a fantastic year for French private equity.” 


It’s true that much of last year’s paralysis was actually rooted in politics, as Agnès Nahum, managing partner at fund of funds manager Access Capital Partners, points out.

Intent on honouring its campaign promises, François Hollande’s new government launched a multi-pronged onslaught on the wealthy, introducing a 75 percent tax on incomes above €1 million, ending the deductibility of interest payments on debt, and threatening to bring the tax treatment of capital gain – including carried interest – in line with that of income tax.

But thanks to some fierce resistance – led by the country’s entrepreneurs and their financial backers (see p. 46) – the worst was avoided. Total tax on carried interest should, in most cases, be limited to 44 percent; that’s still one of the highest rates in Europe, but a far cry from the 90 percent-plus rate envisaged at some point by the government. New laws on deductibility of interest payments were also adjusted, leaving enough room for buyout firms to continue using leverage.   

The relationship between business and government is more constructive now, says Denis Ribon, co-head of 3i France. “We’re seeing the government being much more careful in the way it approaches the business community.  They ask our opinion before launching reforms, consult us on important topics, and express regrets for the way things initially went down last year.”

It also helps that macroeconomic risks have receded a little: the euro has not collapsed, and the country avoided recession last year. So there is more confidence that deals can be done. 

In particular, explains Xavier Moreno, chairman of Astorg Partners, a more stable outlook will allow buyers and sellers to more readily agree on price – something that was particularly difficult amid the choppy economic conditions of last year.

Dominique Gaillard, managing director back (last year’s largest transaction, the sale of Alain Afflelou by Bridgepoint and Apax Partners France to Lion Capital of direct funds at AXA Private Equity, believes 2013 will see deals above the €2 billion mark making a come-, was worth about €800 million). 

Greater enthusiasm is also evident at the smaller end of the market. “Some M&A teams have 15 or 20 transactions in the pipe. There will be a lot of transactions, and a lot of potential for add-on acquisitions, too,” says Christophe Parier, partner at mid-market firm Activa Capital.


But perhaps the most positive developments, some argue, have been on the financing front. Patrick Sandray, head of leveraged finance at Société Générale Corporate & Investment Banking, says that domestic banks are showing renewed appetite to lend, while foreign lenders are also extremely active in the market. “In the past they were mostly interested in larger deals. But today they’re also looking for opportunities in the mid-market.” 

An additional source of liquidity at the lower level of the market, says Gaillard, has been the increase in unitranche offerings by private debt funds. At a moderate additional cost, he suggests, they allow sponsors to side-step the complexity of getting senior and mezzanine lenders to agree together – while providing greater flexibility to finance add-on acquisitions. 

There’s also been a big change in the high yield market, says Robert Daussun, chief executive of LBO France. “That’s probably the single biggest positive feature this year. Since the beginning of the year, the high yield market [has been] on fire.” Figures support his argument: high yield bond issuance for buyout transactions reached €768 million in the first two months of the year, the highest total since at least 1995, according to Dealogic. 

Daussun thinks this will provide a useful boost to larger deals. Last year, he explains, a fund the size of LBO France struggled to raise more than €300 million in senior and mezzanine (thus limiting transaction sizes to about €600 million, assuming a similar-sized equity cheque). But a high-yield bond issue can help GPs secure an extra €200-€300 million – thereby getting them closer to the €1 billion mark. 

All told, this should allow leverage levels to climb again, concludes Sandray. “Today it’s no longer impossible to see total leverage, including senior and subordinate debt, reach 5.5 or six times EBITDA. It’s something that was almost unheard of in 2011-2012.” Equity to debt ratios have also been easing, moving from the 50/50 that has been typical in recent years to a more lenient 35/65.


Unfortunately, many industry participants caution that this brightening outlook is unlikely to benefit everyone. 
For one thing, argues Sandray, financing is only really available for high quality assets with impeccable credit profiles and strong cash generation – usually companies operating in very resilient industries, or with good exposure to emerging markets. But how many assets like this are in the pipeline? 

Daussun thinks the opportunity to carve out primary deals will be limited this year: cash-rich in an environment of low interest rates, corporates will feel no pressure to get rid of non-strategic assets, he says. Nor will successful entrepreneurs be in any hurry to sell their companies, he argues, while there’s still uncertainty about how much of the proceeds they’ll be able to keep. 

He does think that the market will see a rise in secondary sales – because a number of GPs, stuck with ageing portfolios, are under pressure to return cash to investors. But Eric Cartier-Millon, a partner at Paris-based Gide Loyrette Nouel, wonders how many of them will be interesting deals. “We will see good secondary opportunities in 2013. But there will also be companies saddled with debt, where the equity is worth close to zero, because they were bought at the height of the leverage bubble on high levels of EBITDA. It will be very complicated to exit those.”

Good deals are also harder to find in the first place, says Benoît Bassi, chairman of Bridgepoint’s business in France and Italy. “Until 2006-2007, many acquisitions were made via auctions. But today there are far less intermediated processes. To find out about a deal you have to be proactively searching for it, or you need to be called first – which you can only do if you have a very good network.” 

All of which will mean fewer deals available to fewer firms. “If before the crisis you had 100 deals concluded per year, at all quality and price levels, today only the 20 best end up being done,” says Eddie Misrahi, chairman and CEO of Apax Partners France. With the capital overhang from 2007-2008 still weighing on the market, some funds may end up withering on the vine, he says. 

Yet perhaps the more significant challenge for French private equity will be raising the next round of capital. According to a report by AFIC, the industry is about to run out of cash: money deployed has outpaced capital raised for more than three years in a row, with a cumulated deficit totalling €5.7 billion in July 2012. 40 percent of funds based in the country have less than 19 percent of their capital still to invest, the study found. 

Refilling these coffers will not be easy. The domestic base of LPs is narrowing fast: French banks and insurance companies have largely retreated from the market, thanks to regulatory constraints linked to Basel III and Solvency II. Nor have other institutional investors shown much willingness to take up the slack, says Godron. “I still can’t understand why for instance when some of the world’s largest pension funds allocate 8 percent to the asset class, our own long term investors can’t get over 1.5 percent.” 

Even more concerning is the lack of interest from foreign investors. “A large number of American LPs currently have a blanket ban from their board on investing in France,” says Nicolas de Nazelle, managing partner of French placement agent Triago. And it’s not just that investors are still nervous about the sovereign debt crisis, he explains; they also see France as a political basket case. 

So the year is likely to see casualties on the fundraising front too. Philippe Audouin, chief financial officer at Eurazeo, thinks that larger funds with a strong brand will probably manage to fundraise successfully – although it will take longer than in the past. Pan-European funds will also be able to attract foreign LPs, by selling the benefits of diversification. But French-only funds will have a daunting task, reckons de Nazelle. “The only ones who can raise without serious challenge are those with a faultless portfolio, an impeccable track record, and good visibility on exits.” 

Options thus look limited for the country’s weakest funds, says Simon Moss, head of Europe at Hermes GPE. Some may survive for a while by asking LPs for extensions, he says, or turning to a deal-by-deal fundraising model. But it will be hard to bounce back from that, he predicts. “It is likely there will be a contraction at the smaller end in particular, and then some larger groups could also find themselves in trouble.”


Despite these challenges, few managers seem tempted to pack up and leave. 

“I think talks of exodus are largely exaggerated,” says Gaillard. “You may be able to manage a €3 billion deal from abroad, but if you want to source a deal in the mid-market you need to operate locally.”

Misrahi agrees. “There are rumours of whole teams planning to move to London or Luxemburg. But I think this is only possible if you’re the Parisian team of a Carlyle or a pan-European firm. If you do 90 percent of your deals in France and you decide to leave, you’re completely out of your market.”

Instead, the most optimistic GPs argue that they will soon be operating in an easier climate. Gaillard reckons the private equity landscape is becoming less competitive, offering more room for manoeuvre for the firms that remain active. “We’re already seeing it at the €150 – €600 million deal space. A few years ago, you had one chance out of eight to win a deal. Today it’s more like one out of three.”

Some GPs are also noticing a change in attitude from the region’s LPs. “There’s clearly been a shift in psychology over the past few weeks,” says Daussun. “Investors are starting to think about 2014. With record-low returns on government bonds, French investors are more willing to take risks. And long-term economic prospects will soon prompt foreign investors to think about France again.”

Perhaps most importantly, many industry participants continue to believe that despite the ongoing macro level uncertainty, France remains an economy with fantastic potential. They point that the country is home to plenty of fast-growing SMEs as well as more mature businesses with lucrative niches or strong exposure to emerging markets.

“Over the long term I’m not pessimistic at all about the French economy,” says Godron. “We have an advanced technology, skilled management teams, and a developed legal system. If we give a bit more reassurance to our entrepreneurs, and a bit of capital to our funds, I don’t see why things wouldn’t pick up again.” 


If French taxes are not as hard on entrepreneurs as they could have been, it’s in no small part thanks to a group of activists called Les Pigeons – or ‘the suckers’, in colloquial French. 

Initially started as an online column to protest against planned hikes in capital gains tax – which were seen as punitive for successful entrepreneurs looking to sell their businesses – the movement even threatened to take to the streets, eventually forcing the government to backtrack. 

It’s been lauded as a big win for French entrepreneurship. But in fact it was only a partial victory, explains Jean-David Chamboredon, CEO of start-up fund ISAI and co-founder of Les Pigeons. “The government heard only one part of our message. It relieved some of the pressure on entrepreneurs, but maintained a dissuasive tax rate on business angels. So entrepreneurs who qualify and do well will have to pay less tax, but many will struggle to get there because they won’t get access to financing in the first place.” 

That matters to the rest of the economy – including private investors further downstream, he argues. “The start-up ecosystem is like a pyramid. If you want it to be tall, you need the base to be wide. So you need strong support at the very bottom.”

Fortunately, he thinks the political wind is now blowing in the right direction: possible revisions to capital gains tax could happen in the wake of the Assises de l’Entrepreneuriat, a public-private forum where the issues of taxation and entrepreneurship are currently being debated. “If anything, the current discussion helps show how full of holes our fiscal system actually is. And the government now understands that this creates a lot of uncertainty for small and medium companies, which ultimately is not good for job creation. So there clearly is a will for things to change.” 

Does that mean the Pigeons could soon be back to their nests for good? Too early to say, he replies. “If the current discussions lead to a satisfying outcome, then yes. If not, we can reactivate the Facebook page anytime. But I hope we won’t have to do it.”