Outlook 2015:The French Renaissance?

PE activity in France is set for a resurgence, but the strength of the recovery hinges on political reforms, says Activa’s Michael Diehl

It’s been another quiet year in the French mid-market. Despite the surge in mergers and acquisitions – at €84.2 billion, France’s M&A activity in the first half of 2014 reached the highest first six months since Mergermarket began keeping record in 2001 and substantially surpassed 2013’s annual value of €30 billion – private equity activity, especially at the lower end of the market, has been muted, said Activa partner Michael Diehl.

“In a world where valuations tend to be quite high, valuations in France are probably a little lower than the median around the world, and so that has attracted large strategic buyers who say ‘this is a once in a cycle opportunity to buy quality French assets,’” Diehl said. “That’s tended to be focused on the upper end of the market while at the lower end of the market, the market’s been pretty quiet.”

Despite a lacklustre 2014, private equity activity in France is on course for a resurgence as firms head into the new year, bolstered by changes in the political landscape, according to Diehl.

“We are confident there’ll be a pick-up next year in activity, and it’s just a question of whether it’s a bounce-back type pick-up, which there’s certainly room for, because the French mid-market’s been quiet for many years, or whether it is a slower-type pick-up,” Diehl said. “The number one thing behind the strength of the recovery will be political reforms – and the message about reforms sent by [French president] Hollande.”

The reforms to which Diehl is referring are those announced by French Prime Minister Manuel Valls and economy minister Emmanuel Macron – a former Rothschild banker who was appointed earlier this year – in early December. As well as a proposal to allow shops to open up to 12 Sundays per year, up from five, the pair have put forward plans to loosen regulation in a number of industries, including the transport, retail, legal, pharmacy and dentistry sectors.

“That’s extremely welcome from a private equity point of view because those deregulated sectors in the past have been very good hunting grounds for private equity, be it the pharmaceutical lab testing sector, which obviously remains very interesting in France, or the nursery childcare sector, which was recently deregulated and has led to some very, very good PE deals,” Diehl said.

Diehl also noted that there has been a pick-up in corporate spin-outs in France, which could throw up lucrative opportunities for GPs.

The French government has also taken measures to assuage fiscal uncertainty, which has been a stumbling block for the country’s economy.

“The government has made a vow not to do any major tax changes from now until the next elections of 2017,” Diehl said. “Greater visibility on taxation will be a positive factor for dealflow in France.”