French Private Equity Conference
26 January 2017
Cercle National des Armées, Paris
Written by Rebecca Ford
Olivier Younès, founder & CEO of EXPEN and the moderator of the Opening Panel at the French Private Equity Conference in Paris on 26th January 2017, indicated early on that “the sky appears to be very blue” in the French private equity industry, with the total invested up 50% on the previous year, and the number of exits up 10%. However, he also noted that there is a plethora of social and economic problems all around the world which are transforming the business world and leaving the stability of investment management hanging off a precipice. Here are the five key takeaways from the discussion.
1.Funds are up, valuations are up, France is on the up
Philippe Poletti, head of mid-cap buyouts at Ardian, noted that “France and Europe have become attractive again, to all types of investors and from all geographies”, and it’s clear that the figures reflect that. Ardian raised eight billion Euros last year, and with the low Euro, low inflation rate, and large majority of midsize companies in France, global investors are making the most of a stable environment. Louis Prothery, managing director at Eurazeo, suggested that LPs are becoming more and more selective about which firms the back, and due to the practice of Quantitative Easing on both sides of the Atlantic, “high valuations are just a fact of the macroeconomic environment”. William Gilmore, head of investment in Europe at Aberdeen Asset Management, suggested that the rush of cash to the French private equity market could be due to disappointing returns in other asset classes, such as hedge funds, as well as the strong and regular flow of transactions in France.
“There is a renewed interest in the French market, and that’s partly due to the fact that it is a market where money can be put at work; there is a regular flow of transactions.” – William Gilmore
2.Value creation requires flexibility, adaptability, and a little bit of clairvoyance
Louis Prothery said plainly that “to create value for LPs, we just have to work more on the sourcing, on the value creation during the holding period of our deals”. If, as William Gilmore suggested, private equity is in its fourth generational period of sector specialisation (following buying well, cost-cutting, and leverage), it certainly appears to Philippe Poletti that an ability to anticipate value creation even before acquisition is the key to driving growth. Philippe Poletti added that GPs want to buy assets that are growing more than the market, and that investors and management teams should aim to double the size of the market between entry and exit, primarily through a buy-and-build strategy.
3.Optionality in strategic exits might be what you’re missing
Ardian sent 1.7 billion Euros back to their LPs in 2016, making it a bumper year for exits, but in Philippe Poletti’s experience, discipline during the exit process is of prime importance. He advocated seizing exit opportunities when an appropriate deal arises, even if that means pulling out of the holding period earlier than originally planned. He added that the specific exit route is not a consideration at the entry point, but instead the principal factor to take into account is the potential for strategic value augmentation. In terms of secondaries, which according to Louis Prothery make up a considerable portion of the French exit market, William Gilmore said that they could be a good option, but with limitations. For small funds looking to sell to larger ones in order to internationalise, it can work, but he criticised the growing trend for tertiary, quaternary, and further subsequent deals can feel “like pass the parcel“.
“LPs are becoming more and more selective about which firms they back, so we see a little bit of bifurcation in the market.” – Louis Prothery
4.New players on the market are to be watched but not worried about
Louis Prothery strongly advocated sector specification as a means of staying on top of the competition and making yourself stand out in the crowd, saying “within each sector, we have to sub-segment, and sub-segment again and focus on really short sections of the industry”. William Gilmore emphasised a difference between the fields of investment management and fund management, supporting the idea of trying to reduce the gap between gross IRR and net IRR, as it’s this that can make a real difference in what LPs ultimately receive from transactions. Philippe Poletti, when asked by Olivier Younès about the emergence of new players in the market, said that a competitive environment is always a good thing because it makes everyone push for excellence, but that the real key was adaptability. If entry prices and the very fabric of the market are changing due to the new faces on the block, the established players must be prepared to chop and change and work hard to maintain current high levels of returns. Louis Prothery, on the other hand, was not concerned about new players, as they are not very prevalent in the mid-market in France, where the majority of French transactions take place.
5.The future is uncertain, but the general feeling remains one of optimism
At the end of the panel discussion, Olivier Younès asked each speaker to contribute one prediction for the next year in private equity. William Gilmore’s prediction was succinct: the largest fund ever raised in Europe, by CVC. Louis Prothery looked through more macroeconomically-tinted glasses, suggesting that interest rates in Europe will rise, and we will soon see the decorrelation of the German, French, and British economic markets. Finally, Philippe Poletti suggested that digitalisation will continue to increase, but, ever the optimist, he took confidence from the “capacity that our industry has shown in adapting, probably much quicker than most of the other industries”.
Stay tuned to find out more about the upcoming FPEC official report!