The uncertain future of French fundraising

Some France-focused funds have recently enjoyed fundraising success, but conditions may be about to get significantly harder. Toby Mitchenall reports

If individual fundraising performances could be read as symptomatic of the wider market, then a couple of recent closes would suggest that the French private equity is very much a market segment du jour among limited partners.

Among the aforementioned firms was 21 Partners, a private equity firm operating in the French and Italian mid-markets, which closed its fourth French fund on €380 million. The process took about a-year-and-a-half – longer that normal, says 21 chairman Gerard Pluvinet – but in the end the firm managed to raise more for Fund IV than for its predecessor, which closed on €330 million in 2006. Unusually for 21 Partners, its France fund comprised capital mostly from outside of the country. Three-quarters of the fund came from non-French investors, because, says Pluvinet, “there was a lack of banks and insurers in the market, because of [the threat of restrictions that would be imposed by incoming regulation] Basel III and Solvency II”.

Paris-based Astorg Partners, meanwhile, is currently understood to be near to closing its fifth buyout fund on €1 billion, surpassing its €800 million target. Astorg was unavailable to comment on its fundraising progress, but according to data service Private Equity Connect, the firm has historically had a number of international backers, such as Partners Group, Scottish Widows Investment Partnership and Adams Street Partners.

France-focused funds raised a total of €2.7 billion in 2010, according to data produced by European placement agent Acanthus, which puts the year on a par with 2007 and 2008, although some way behind 2006 (see chart).

As discussed in these pages before, the pool of domestic French limited partners is dominated by banks and insurance companies, more so than any other European country. These two groups of institution are both subject to incoming regulation which will most likely push them away from investing in private equity funds. Incoming global banking regulation, dubbed “Basel III”, will require banks to increase their capital reserves and liquidity and will likely lead them to move away from illiquid alternative asset classes such as private equity. In the insurance sector, meanwhile, a set of regulatory requirements under the banner of Solvency II will push insurance companies in European Union to take similar measures.

Paris-headquartered Apax Partners France is likely to close its eighth buyout fund on between €700 million and €750 million in June this year, according to the newly appointed chairman and chief executive officer Eddie Misrahi. The fundraise started before the meltdown of the financial markets in 2008 and has since progressed slowly as LPs, many of which still had large amounts of undrawn commitments, adopted a “wait-and-see” approach to investing and took more time to perform more thorough due diligence.

As with 21 Partners, Apax France will finish its fundraising with a greater proportion of non-French LPs than in previous funds. The banks and insurers, notes Misrahi, “are being incentivised either to reduce or at most maintain their exposure”.

The French/non-French LP shift was not such an issue for Argos Soditic, which held a first and final close for its latest fund in January this year. Through its Euroknights VI fund, which hit its €400 million hard-cap, Argos Soditic invests in small- and mid-cap companies in France, Switzerland and Italy, with France being its largest market for investment. The fund came to market in May 2010 with a target of €360 million and an impressive 90 percent of the firm’s previous investors returned. Guy Semmens, a partner with Argos Soditic, says the firm has never raised more than 5 percent of its capital from French LPs, but even this proportion was lower this time around.

The extent of the withdrawal of banks and insurers from the private equity market in France is confirmed by fundraising data compiled by AFIC, the French private equity association, in conjunction with Grant Thornton. In the first half of 2008, banks and insurers together accounted for around €3.9 billion in private equity commitments.

Pension funds accounted for €1.4 billion and family offices accounted for €1.7 billion. In the first half of 2010 – the most recent data collected by the association – banks and insurers committed a total of just €262 million between them. Family offices, meanwhile, remained more committed to the asset class, according to the AFIC data, committing more than €500 million in the first half of 2010.

Worryingly for many French GPs, the private equity market continues to focus its fundraising attention on domestic limited partners. In the first half 2010, €1.1 billion was raised from French investors, while just €495 million was raised from elsewhere in Europe and the rest of the world. This will not last, predicts one GP, who says that any private equity firm reliant on French investors to raise capital is “in for a shock”. “I think many of the more professional GPs in the French market are hoping that this will be the time for a ‘thinning-out’,” he says referring to the very crowded GP marketplace. Many funds, he continues, have been able to raise money from family offices – often through personal connections – without the necessary levels of professionalism. These family offices are now thinking twice about private equity, he says, and the banks and insurers are being “regulated out of the market”.

On this note, the French market has already gone through a certain amount of consolidation, particularly as regards groups connected with the insurance and banking industry. Last year German insurer Allianz sold AGF, its French private equity fund of funds platform, to IDI Group, an independent French private equity firm. French bank Natixis, meanwhile, sold its private equity interests to AXA Private Equity in a deal worth more than €500 million.

More recently, ACG Private Equity, a fund of funds manager with more than €500 million under management, acquired a private equity fund of funds business from Paris-based investment bank Gimar Finance. ACG, which is now raising a secondaries fund with a €150 million target, is planning to “participate actively in the restructuring of the private equity industry as a consolidator”, according to Wladimir Mollof, the group’s president and founder.

One bank-owned private equity group which is not scaling back its private equity activity is BNP Paribas. The private equity team sits within the asset management arm of the bank and manages both funds of funds and direct investment funds. The fund of funds group has around €600 million in assets under management and commits mostly to European mid-cap buyout funds. The direct investment team manages around €230 million and invests in small- and medium-sized businesses.

To date BNP’s direct business has predominantly raised capital from high net worth clients of BNP’s private bank via tax efficient vehicles. Only a minority of its capital has been raised via an FCPR structure, the traditional French institutional blind-pool private equity fund. This will change this year, says one of the managing partners, Brice Lionnet, as the group is planning to begin raising an FCPR fund this year targeting more institutional money. Lionnet declined to comment on the potential fund size, but one source close to the firm said it would likely target around €100 million.

Part of the reason to seek more institutional backing is that the tax efficient structures for individual investors, known as FCPIs and FIPs, may become a less viable way of raising capital in the future, says Lionnet, who notes that the tax breaks available have already become less attractive.  “I don’t think the incentives will be removed altogether,” he says, “but there is already less incentive attached to them and it is possible that they will become less attractive”.

There are clearly those who still think there is money to be raised in the crowded French private equity market.