French buyout market recovers

Being a GP in France hasn’t been easy in the last couple of years. Like most countries in the euro area, France’s domestic economy has struggled – and its private equity market has had a particularly hard time, undermined by negative sentiment about France’s political climate. In 2012, France’s president François Hollande launched an attack on the wealthy with the introduction of a 75 percent tax on income above €1 billion; he also brought in other measures that it was feared would hurt the country’s buyout practitioners.

In practice, these measures have turned out to be far less financially damaging than many people had anticipated. According to Jean-David Chamboredon, chief executive officer at French internet entrepreneurs’ fund ISAI, the 75 percent tax rate affects only a few hundred people – mostly football players and a few very high-level executives.

The problem was the perception it created. As soon as investors started to believe that France no longer had a business-friendly environment, their appetite for investing in the country subsided massively. “The absurd tax ideas from the current government probably scared international investors,” says Chamboredon. “It was a very bad move; it damaged the reputation of France.”
One advisory source tells Private Equity International that some investors even preferred Italy and Spain over France at one point – explaining why it has been so tough for French-based GPs on the fundraising trail.


LBO France, for instance, postponed fundraising plans in 2012. In 2013, it considered raising an extra €350 million for its existing White Knight VIII vehicle; this would have required a number of its LPs to sell part of their assets to new investors, allowing for a fresh cash injection. But a majority of investors proved unwilling to see their position diluted, a source told PEI last May, so it decided to abandon the top-up plan and embark on a traditional fundraising process instead.

The firm – which declined to comment on fundraising – has been in the market attempting to collect €1 billion for White Knight IX since the beginning of last year. So far, it has amassed a number of commitments for the fund, which is expected to hold a first close on approximately €300 million in the summer. 

Ardian, formerly known as AXA Private Equity, closed its LBO Fund V on its €2.4 billion hard-cap in October. Yet despite closing the fund above target, fundraising was a challenge, admits Dominique Gaillard, a managing partner and head of direct funds at the firm. “During the fundraising of our LBO Fund, the macroeconomic climate in France was not very good. I often spent three-quarters of meetings explaining that it would be safe to invest in Europe and that the eurozone wouldn’t collapse.”

But there are signs that investors have rediscovered their appetite for France, many GPs and other market participants say. “I do think sentiment has changed now,” says Gaillard. “Investors are more optimistic about France overall.” One firm that has perhaps seen the benefits of this is Activa Capital, a Paris-based mid-market firm: it held a €200 million first close on its third buyout fund just before Christmas, PEI revealed in January, as it looks to raise €320 million (Activa declined to comment).

So how come sentiment has changed? Growth is one reason, some argue. “France has not been easy over the past two years – but this is now changing because growth is coming back slightly,” says Sonia Trocme-Le Page, co-founder and partner of Paris-based placement agent Global Private Equity.
“France’s GDP is growing,” agrees Guillaume Jacqueau, a managing partner at Equistone Partners Europe. “It clearly could be better, but the economy is recovering.”

What’s more, the Hollande government has recently adopted a more pro-business attitude, with a number of reforms. It announced a four percent reduction in social security costs, which represents a €20 billion cut in the social security taxation for French companies, says Michael Diehl, a partner at Activa. It is also attempting to reduce the size of the state. “In the beginning of 2014, Francois Hollande announced a few measures that were exactly the reverse of what he was elected on,” says Chamboredon. For the French, he adds, it is clear that “things are getting back to reality”.

As a result, there’s much less uncertainty around, GPs say. “Eighteen months ago, there was a lack of visibility on tax measures,” says Jacqueau. “This is now much clearer – and that is an important change.”
Robert Daussun, chief executive at LBO France, agrees that visibility is one of the main reasons why investors are changing their mind about France,

However, he stresses that this change has only recently come about. “Last June, North American investors were convinced the US economy was on the mend, but they remained concerned about Europe and France,” he says. “When I returned to the US in November, the mood had dramatically changed. The LPs we met said that emerging markets were too volatile and too risky.”

Additionally, LPs told him that the US market was heating up, so it was time to return to Europe, which they felt was on the verge of a rebound, he says. “They wanted to seize the opportunity.”