France: Too Big to Ignore

It is fair to say that the French private equity sector has had a tricky few years. A left-wing government complete with aggressive tax plans and relative inaction on tackling the country's deficit, gave LPs plenty of reasons to bypass the country's buyout market recently.

But there are tentative signs that things are improving; during the first quarter France recorded GDP growth of 0.6 percent, compared with 0.3 percent in Germany. In addition, many market participants are starting to feel more optimistic about France in recent months in line with a shift in the government's emphasis. 

“The French government is becoming more business friendly: it has realised that portfolio companies create jobs,” says Eddie Misrahi, chairman and chief executive officer at Apax Partners France. Michael Diehl, a partner at Activa Capital takes a similar view, calling the French government more “business-minded” than in previous years. “Common sense seems to have won the day.”

Perhaps this is a feeling felt across the wider business community in France – as M&A activity seems to have picked up in recent months. “We have seen some large M&A deals like the merger of Nokia and Alcatel-Lucent, a sure sign that the deal environment in France is getting better,” according to Diehl. 

What's more, entrepreneurs are feeling more encouraged to launch sale processes, market participants say. “There's better visibility on tax, on the economy… There's a better chance of [deals] succeeding because prices are high, debt is freely available and the general deal environment is improving,” says Diehl. “Entrepreneurs are taking 'the glass is half full view' and are taking a pro-active approach to business again and looking to identify a financial partner that can help them grow their business, whereas before everything was a bit stalled in France due to the uncertainty around tax and other government policies.”


This sentiment is backed up by deal statistics from data provider Mergermarket. Last year, the French buyout market saw 187 deals with a combined value of €21.3 billion, a steep increase from 162 deals worth just €6.4 billion a year prior. 

A consortium led by Montagu Private Equity and Astorg Partners invested last year for instance in medical technology company Sebia – which it acquired from Cinven. Cinven – together with the Carlyle Group — also agreed to sell its shares in French cable operator Numericable to partner Altice. 

Other notable deals last year included the sale of French food business Diana Group Ardian and Motion Equity Partners to global trade buyer Symrise in a transaction that values the business at €1.3 billion, LBO France's sale of French food business Labeyrie Fine Foods (LFF) to PAI Partners, and Montagu's investment in Arkopharma, a French pharmaceutical company which it acquired for approximately €300 million. 

But while 2014 was a lucrative year for deals, the beginning of 2015 is looking a lot slower again, with just 42 deals in private equity worth a combined €1.8 billion completed up to 10 May. According to Eddie Misrahi, chairman and chief executive officer of Apax France, that doesn't mean deal flow will turn out to be more muted this year. “Quarterly deal flow numbers don't mean much,” he argues. “We are actually quite busy; our pipeline is very full.”


The deal environment is partly being helped by greater availability of debt, which is bolstered by the emergence of credit funds in the market. “The credit conditions are good right now. There's good availability of debt with many players ranging from banks to credit funds. And there are high yield bonds for the larger deals,” says Vincent Briançon, a partner at LBO France. 

That debt availability has meant activity has picked up, says Helen Steers, a partner at Pantheon. “Following the crisis, France has had a number of difficult years. Deal flow almost halved in 2011-2012. Valuations were low throughout and immediately following the crisis, which is one of the reasons why not many deals were completed – since  vendors and acquirers were too far apart on price. But the deal environment has recovered since then.”

What's more, there are plenty of private equity firms that still have a backlog of portfolio companies in their portfolio, which they are now trying to sell. Add the debt availability and renewed interest of trade buyers and the buyout market in France is becoming increasingly competitive. “I think everybody is concerned about pricing and this is not just for France but for the whole of Europe,” says Steers. 

“There's a lot of liquidity in every part of the financial market as a consequence of quantitative easing. We are always worried about asset bubbles developing and we rely on our GPs to be disciplined in the way they price deals.”


Because France is a well-established market, it can be difficult to source proprietary investments, as many deals will end up in heavily contested auction processes. So how do GPs deal with that? “We always work a long term in advance on deals,” says Misrahi. “Therefore, when it finally becomes an auction process, we would have already done extensive due diligence and will have an advantage.” But when it comes to pricing, there's not a lot that that can be done, he admits. “You do need to pay the full price if you want to win the auction and you need to consider whether you are willing to do that.”

And sometimes that means – declining a certain investment opportunity if the price isn't right. LBO France briefly looked at IKKS, a French clothing business, back in 2014 but decided to drop out of the second round of an auction because the price aspirations were “rather high,” says Briançon.

“The initial price for IKKS was high and in the end, the deal didn't happen last year,” he adds. In the end, Roger Zannier, the founder of Groupe Zannier, who is no longer a shareholder in that group, bought IKKS out of Groupe Zannier using a high yield bond of €320 million. Then in April of this year, LBO France offered Zannier an opportunity to reduce its stake but to stay involved as a significant minority shareholder – which meant the deal went ahead after all, but at different terms. “There's some competition, but at the same time people remain disciplined,” says Briançon. 

Some GPs have had a tough time on the fundraising trail following the economic crisis. LBO France is still in market attempting to collect €1bn for its White Knight IX vehicle. The firm's last buyout funds, White Knight VIII fund, a 2007-vintage is fully invested. Motion Equity Partners used to have a strong presence in France, but that has changed. The firm struggled to raise a fund and restructured one of its vehicles with the help of HarbourVest Partners. “Because it has been hard to raise capital in France, competition has diminished somewhat, which is a good thing for pricing,” says Adam Turtle, a partner at placement agent Rede Partners. “Also, a number of French funds have actually become more pan-European, which means there's less competition for French GPs,” he adds. 

There are however still a number of French GPs on the fundraising trail – competing for capital. Activa Capital is in market attempting to raise €320 million for its Fund III. The firm held a €200 million first close in December 2013. Meanwhile, Azulis Capital is looking to collect €200 million for its latest buyout fund. In February, the firm held a first close when it had amassed €120 million and is looking to wrap up fundraising later this year. Both firms declined to comment on fundraising. 


And while it is not easy to raise, it has got easier. “The change in sentiment is a result of the French government becoming a bit more business-friendly,” according to Turtle. “The new finance minister has been implementing some sensible policies and that has resonated with investors.” “There are still investors that are unwilling to look at France, but I think we are at a turning point,” says Misrahi. “There are more investors that are considering France again.” 

Michel Rowan, managing partner at Azulis has a similar view. “When I was in Berlin last February I noticed a change in the attitude of investors about France. They were more positive [and] thinking about France, a major economy, on a long term basis – which was very different compared to a few months ago.” Fundraising for French funds was up last year; 10 funds collected a combined €2.35 billion, compared to nine funds raising €1.62 billion in 2013, according to PEI's Research and Analytics division. 

However, French GPs do have to compete with a number of pan-European funds that have raised capital recently or are currently in the market. In March, PAI Partners held a final close on its sixth European buyout fund on €3.3 billion, above its initial hard-cap of €3 billion. A month later, Equistone Partners Europe collected €2 billion for its latest buyout fund. Montagu Private Equity is attempting to collect €2.5 billion for its fifth buyout fund, EQT is currently in market raising €5.25 billion for its EQT VII, which has a €6.75 billion hard-cap, and Charterhouse is targeting €3 billion for its Fund X. The fund recently held an initial close of €1 billion on the vehicle. Some investors feel they are getting enough exposure through France by backing some of those pan-European managers. “North American LPs tend to back pan-European funds in order to get some French exposure and this may have hurt French GPs on the fundraising trail,” says Turtle. 

But despite the fact that US investors may approach France, with caution, European, Asian and Middle Eastern investors are still interested in France, according to Turtle. “Many of them like to back country [specific] managers.”

And there are enough reasons why France is looking attractive at the moment, insists Rowan. “Economic growth is expected to rise slowly in France in the coming years: GDO is expected to reach 1.2 to 1.5 percent in 2015 versus 0.4 percent in 2014. Clearly this rebound is significantly backed by the drop in oil prices and the euro currency. Nevertheless I do believe the [economic] reforms implemented will comfort the rebound in the economy.”

And while it's worth noting that while private equity is more of a micro play, at the same time you can't ignore the macroeconomic perspective, says Steers. “The whole of Europe is currently helped by a weak currency and by historically low interest rates and lower oil prices. Those three factors are providing huge tailwinds right across Europe, in particular in the Eurozone. French GPs who focus on companies that address a global market and are export focused are definitely going to be helped by the lower euro.”

LP sentiment is often driven by macro-economic factors, says Turtle. But it's worth remembering that France is one of the strongest private equity markets in Europe. There are plenty of deals, French funds have historically delivered good returns and unlike in other markets, French entrepreneurs don't mind selling to private equity, so the climate for private equity is actually very robust.”

All told, the country's buyout market may have suffered in recent years, but for many LPs it continues to be an important part of their portfolio. As Diehl puts it: “France remains the biggest private equity market in Europe after the UK and it is simply too large for investors to ignore.”