A third way for private equity

Jean-Bernard Lafonta, chief executive of Wendel Investissement, may seem an unlikely ally for the trade union delegates who have been harrying the private equity industry in recent weeks.

Admittedly Lafonta, an urbane former investment banker who in the last five years has transformed Wendel from an unremarkable French holding company into one of Europe's leading principal investors, is unlikely to be found holding a placard outside Permira boss Damon Buffini's local church any time soon.

However, like many of the industry's trade union opponents, Lafonta is a firm believer in the gospel of transparency. “It is important for funds not to be hidden. As the industry gets bigger and more important, they have a public responsibility to tell people what they do,” he tells PEI in his stunning 19th century office in the ninth arrondissement in Paris during an interview in March. “You can't decide to keep secrets; you must be in the light. You must be able to justify how you make your money. Wendel, as a public company, just does it.” And Lafonta believes other firms should be following suit. “It's never too late to disclose. I think there'll be a gradual evolution towards greater transparency.”

As long as Wendel can create value or be useful as a shareholder, we will hold our investment

Jean-Bernard Lafonta

Private equity firms across Europe would do well to take notice, because under Lafonta's leadership, Wendel has developed a model that seems to answer many of the current criticisms of the industry.

The company has three advantages over its rivals in the battle for hearts and minds in France. First, it could hardly be described as a flyby- night investor – Wendel has been investing in France since 1704. Second, it is a public company, so it is used to disclosure – unlike most other buyout firms, it publishes details of the performance of its portfolio companies and the remuneration of its directors. And finally, because it does not invest from a closed-end fund, it has no reason to think in terms of a finite exit timetable, so it is unlikely to be characterised as a “quick-flip merchant”, as some of its competitors are.

SUCCESS ABROAD
The Wendel proposition is already proving a powerful sales pitch to management teams. When the French house completed its first US deal last year, with the acquisition of haulage operator Deutsch, it fought off competition in the final round of the auction from Bain Capital and Carlyle – a traditional French investor beating two blueblood US firms on their home turf, to buy a family-owned asset. Lafonta says this happened because Deutsch saw Wendel as a long-term investor: “They sold to us because they felt we would take care of the company over a period of time,” he explains.

Unlike its industry rivals, Wendel is unlikely to come under time pressure to sell. As Lafonta puts it: “As long as Wendel can create value or be useful as a shareholder, we will hold our investment. In fact, we only look at situations where longterm ownership can be a competitive advantage.”

Bureau Veritas, a French compliance specialist, provides a perfect example of this long-term approach. Wendel first bought a 20 percent stake in 1995, and has steadily built up the stake to its current level of over 99 percent. The company employed 8,000 people at the time of Wendel's original investment – now it employs more than 23,000, after a string of acquisitions. Says Lafonta: “Bureau Veritas shows what you can do if you have time, with a good company in a good market: create a world leader.”

This is not to say Wendel cannot realise value from its holdings. Last year, it enjoyed spectacular success with a partial exit from French electrical parts manufacturer Legrand, which it bought for €3.7 billion alongside US buyout giant Kohlberg Kravis Roberts in 2002.

It is important for funds not to be hidden. As the industry gets bigger and more important, they have a public responsibility to tell people what they do

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At the time, the deal was the largest leveraged buyout in Europe to date, and it remains Wendel's biggest ever acquisition – a bold and opportunistic move from a company that had only just decided to focus on control investments. Its involvement was also critical for KKR – the presence of Wendel, one of the most venerable institutions in France, helped to circumvent any political opposition to a US company buying into such a large asset.

Last year, Legrand went public in a flotation that was so heavily oversubscribed that it caused a temporary suspension of the Euronext exchange. The offering raised €1.1 billion for the company's backers, who both retained a 30 percent stake.

It was more than just another lucrative deal. Legrand also provides a blueprint of how private equity can improve a company to the benefit of all concerned – owners, managers, employees and even the public markets.

Soon after the firm was taken private, Wendel stated openly that it was looking to return the company to the public market in a few years' time. This gave it the opportunity to boost the company's performance before floating the 20 percent stake last year. As a result, public equity investors can now benefit from the company's success, while the continued presence of Wendel and KKR – both have no plans sell their stakes for the foreseeable future, according to Lafonta – reassures the market that Legrand's growth story can continue. And to complete the picture, even Legrand's employees benefited, thanks to an equity participation scheme introduced by Wendel.

So the Wendel model is delivering results – and not just in France, as the Deutsch deal shows. Given the company's ambition, there is every chance that Wendel could become an increasingly influential player in European private equity. “We plan to stick to deals with a minimum enterprise value of €1 billion,” says Lafonta. “But if we wanted, we could invest significantly more equity in a single deal.”

Some bankers believe this could mean an equity cheque of more than €1 billion – and with this kind of firepower, Wendel will be able to compete for deals with the very biggest firms in private equity. So the whole industry should be paying careful attention to the Wendel approach