France 1997: Disbursements Rose 44% As Fund Raising Wavered

The value of the French private equity market grew by 44% in 1997 to an all-time high of FFr 8.3 billion, according to an annual activity survey carried out by Association Francaise des Investisseurs en Capital (AFIC), France’s national venture capital association. This growth was more than double the 17% increase in investment values recorded between 1995 and 1996, reflecting both increased confidence springing from the contry’s improving economic climate and the return of a number of players to the market following the restructurings of their parent groups.

As the figures for pan-European activity recently released by the European Venture Capital Association (EVCA) confirmed, the majority of principal markets saw substantially increased levels of investment during 1997, contributing to the 42% growth in disbursements for Europe as a whole.

But although France’s investment growth last year was in line with wider trends, the market did not experience the explosive growth in new funds raised that was seen elsewhere in Europe, most notably in the UK. Whereas the EVCA recorded growth of more than 150% in European private equity funds raised last year, the AFIC figures show that the FFr 4.3 billion total new funds raised by its members fell slightly short of the FFr 4.7 billion attained in 1996.

For the French market, however, the level of new funds raised tells only part of the story. The total value of French private equity investments from 1994 to 1997, FFr 26.1 billion, exceeds France’s total private equity fund-raising during the same period by around FFr 10 billion. This discrepancy can largely be accounted for by realised proceeds available for reinvestment. AFIC states that in 1997, private equity investors’ coffers were topped up by a further FFr 2.8 billion in realised proceeds, taking the total capital inflow for the year to FFr 7.1 billion. If realised proceeds available for reinvestment and new funds raised for the past three years are taken into account, capital totalling FFr 18.8 billion became available for investment during the period, compared with a three-year disbursements total of FFr 18.9 billion.

The number of companies receiving backing from France’s venture capitalists fell slightly last year to 1,551 from 1,691 in 1996, with a concomitant increase in average investment size to FFr 5.3 million, compared with FFr 3.4 million.

Acceleration of the French buyout market, which experienced substantial growth in both volume and value, was the principal factor underlying the increase in average investment size. The growing bias towards buyouts was partially counterbalanced by a 12% increase in the value of “venture” – i.e., seed, start-up and early-stage – investments, although the number of venture capital fundings recorded fell to 526 in 1997 from 607 the preceding year.

Investment Patterns

The French private equity market has traditionally placed greater emphasis on early-stage investment than most of its European counterparts, and despite increasing levels of buyout activity, this trait is still evident. Although the 12% growth in the total value of venture-type investments last year was modest in comparison with the jump in total investment values, the FFr 1.1 billion deployed in this sector of the French market represented a 13% share of total 1997 disbursements, while the comparable proportion for Europe as a whole was just 7.4% of the total invested.

As in previous years, development capital deals outnumbered other investment categories. Indeed, their 36% share of market volume slightly outweighed the combined share of seed, start-up and early-stage transactions. The relative preponderance of development capital, however, has declined considerably since 1994, when such transactions accounted for more than half the deals recorded and absorbed 45% of the funding. By 1997, the proportion of total funding absorbed by development-stage deals had fallen to 30%. At FFr 2.5 billion, the total invested in development capital was slightly more than the FFr 2.3 billion recorded in 1996, but remained considerably less than the FFr 3.2 billion value of the French expansion capital market during 1994. Although 49% of UK deals in 1997 fell into the expansion category, a considerably higher proportion than in France, development capital accounted for an identical proportion of total disbursements in both markets. In line with the general European trend towards larger single investments, the average size of expansion capital investments in France increased to some FFr 4.5 million in 1997, compared with FFr 3.8 million the year before.

Change of ownership – buyouts, buy-ins and institutional purchases – was the only investment class in France where an increase in transaction numbers was recorded between 1996 and 1997. According to the AFIC survey, 181 buyouts/buy-ins were completed in 1997, 49 more than in the previous year; this corresponds to an increase to 12% from 8% in this sector’s share of the market by volume.

The growth in buyout and buy-in numbers was modest, however, in comparison with the increase in value of these types of deal last year. The value of buyouts and buy-ins soared by nearly 140% to FFr 4.02 billion from a 1996 value of just FFr 1.7 billion, a growth-rate more than three times that of the French private equity market as a whole. The proportion of total disbursements devoted to buyouts/buy-ins grew to 49% in 1997 from just 29% in 1996.

This dramatic shift aligns French investment patterns somewhat more closely with those of the UK, where buyouts accounted for 30% of completed deals but 65% of capital invested last year, and Europe as a whole, where buyout investments accounted for slightly more than 50% of total private equity disbursements in 1997. The average size of French buyout and buy-in investments last year was FFr 22 million, compared with slightly less than FFr 13 million in 1996.

France saw 611 investments in technology sectors – defined by AFIC as telecommunications, IT, electronics, biotechnology, healthcare, industrial automation, new materials and energy – corresponding to 39% of total deal volume.

Industrial companies were the next most popular investment category, accounting for 25% of deals, followed by consumer goods, at 19%, and the “tertiary” sectors – transport and distribution, financial services and other services – at 15%. The value of these tertiary investments, however, at nearly FFr 3.3 billion, represented 39% of the market value, while technology deals, with their smaller average size, absorbed only FFr 1.7 billion, or 21%, of 1997 disbursements.

Having said that, the average value of French investments in technology-related sectors in 1997 was FFr 2.8 million, appreciably more than the FFr 2.2 million recorded in 1996.

Nearly 60% of investments made last year were in companies employing fewer than 100 staff, but these deals accounted for only 19% of market value. Thanks to a relatively small number of larger buyouts, companies with 1,000 to 5,000 employees accounted for only 6% of completed deals but received 46% of total capital invested during the year.

Last year proved successful for French private equity groups in the realisation front. Divestments at cost during the year totalled FFr 7.75 billion, compared with FFr 4.4 billion in 1996, while the number of divestments grew to more than 1,000 from some 850. This growth reflects both the increasing maturity of the French private equity market and the beneficial effect on liquidity of France’s Nouveau Marche and Europe’s other new stock markets.

Independents Double Investment

Investment by independent private equity groups more than doubled last year to FFr 4.3 billion, or 52% of total market value, from FFr 2 billion, or 36% of disbursements, in 1996. However, their share of deal volume fell 7% to 35% between 1996 and 1997.

Although this latest AFIC survey does confirm that the relative importance of captive investors in the French market has diminished during the past decade, the demographic shift towards independents and semi-captives is less marked than commentators’ predictions might have led one to expect. Captives executed 27% of deals completed in France last year, and their investments were valued at FFr 2.6 billion, or 32% of total disbursements. Although these figures are well below captives’ 1994 tally – 496 investments worth FFr 3.1 billion, accounting for 34% of market volume and 43% of total investment value – they represent a remarkable recovery from 1995, when captives invested just FFr 1.2 billion, or 21% of total disbursements, in 239 deals accounting for only 21% of market volume. Semi-captives made 530 investments last year totalling FFr 1.3 billion, compared with 333 transactions valued at FFr 1.5 billion in 1996, and their share of market value fell to 11% from 15%, although in terms of deal numbers, they captured 34% of the market in 1997, compared with only 20% the previous year.

Fund Raising Trends

As noted, France missed out on the 1997 European fund-raising boom, experiencing instead an 8% decline in new capital raised. The FFr 4.3 billion (excluding proceeds available for reinvestment) garnered by France’s private equity fund raisers pales in comparison with the UK’s staggering 1997 haul, which, at some ecu 9.6 billion, was some 14 times greater than its neighbour’s. As well as being invidious, however, this comparison is grossly misleading, because many of the largest UK funds raised have a pan-European investment remit, with France featuring prominently in their list of target markets.

The existence of such pan-European vehicles may also explain why non-European investors, who provided more than 47% of private equity capital raised in Europe last year, committed only FFr 783 million, or 18%, of funds raised in France.

This figure represented a small decrease in both relative and absolute terms in comparison with their contributions in 1996.

Domestic investors have always been the principal source of capital by far for France’s venture industry, a phenomenon some observers have blamed on “insularity” on the part of the French or a preference among international institutions for “Anglo-Saxon” practices and structures. There is probably some truth in both these assertions as well as in the theory that investors may have been deterred in the past by the poor performance of certain French management groups. But one of the most obvious reasons for the relatively low level of international participation in French private equity funds is that the majority of these vehicles are relatively small in international terms.

The profile of participants in French venture funds differs considerably from both the pan-European and UK models. Pension funds, for example, have historically been a relatively minor source of capital. They contributed only 4% of total funds raised last year, less than half their FFr 381 million commitment in 1996. As the means by which France meets its pension obligations are restructured from pay-as you-go to funded pensions, the importance of pension funds as a source of venture capital will inevitably increase dramatically. That time, however, is still some years away.

Meanwhile, appetite for French private equity among corporate investors surged last year to unprecedented levels; these groups accounted for nearly FFr 1.2 billion, or 28% of the 1997 fund-raising total. Banks, the mainstay of France’s fund-raising market, decreased their share of the market slightly to 58%, or FFr 2.5 billion, from 60%, or FFr 2.8 billion in 1996. This compares with banks’ 26% share of the pan-European fund-raising market and their 11% stake in UK funds raised in 1997.

Only 6% of total funds raised last year came from insurance companies, compared with 15% in 1996. However, thanks to changes in the regulations concerning the composition of life assurance companies’ portfolios, the road is now open for French insurers to boost their unquoted investment activities substantially in the years to come.

Allocations by captives totalled FFr 2.6 billion, accounting for over 61% of funds raised in 1997, 16% more than the previous year, providing further evidence that the demise of the French captive investor has been greatly exaggerated – although it should also be remembered that fund offerings from independent French groups last year were particularly thin on the ground.

Judging by fund-raising activity to date this year, the final figures for 1998 will see the balance reversed again in favour of independents and semi-captives.

Given the unprecedented volume of capital now at the disposal of private equity funds with a pan-European remit, it would be foolish to draw any firm conclusions about likely future activity levels in France from the purely domestic fund-raising total featured in the AFIC survey.

The country’s larger buyout market is flourishing at present, a factor that is likely to increase overseas interest, and a number of France-specific vehicles are currently being offered to international investors. Private equity investment in France is unlikely to be constrained by any lack of capital in the foreseeable future.

Table 2: French Investment Distribution by stage, 1994 – 1997

1994 1995 1996 1997

No. FFrM No. FFrM No. FFrM No. FFrM

Seed 17 16 14 13 7 14 10 6

Start-Up 117 151 156 231 254 548 245 590 Early-Stage 82 106 180 293 346 421 271 501 Development Capital 741 3,219 469 1,693 615 2,348 559 2,507 Buyout/Buy-In 243 2,090 151 1,660 132 1,685 181 4,022 Replacement Capital 242 1,608 174 1,034 337 730 285 631

TOTAL 1,442 7,190 1,144 4,925 1,691 5,746 1,551 8,257

Source: AFIC

Table 3: Distribution of Investment by Type of Private Equity Manager

a) by number 1994 1995 1996 1997

No. % No. % No. % No. %

Independents 506 35 401 35 718 42 542 35

Captives 496 34 239 21 560 33 419 27

Semi-Captives 372 26 393 34 333 20 530 34

Public Sector 68 5 111 10 80 5 60 4

TOTAL 1,442 100 1,144 180 1,691 100 1,551 100

b) by value 1994 1995 1996 1997

FFrM % FFrM % FFrM % FFrM %

Independents 2,465 34 2,071 36 2,041 36 4,313 52

Captives 3,116 43 1,232 37 2,100 37 2,617 32

Semi-Captives 1,530 22 1,497 26 1,530 26 1,272 15

Public Secto 79 1 125 1 75 1 55 1

TOTAL 7,190 100 4,925 100 5,746 100 8,257 100

Source: AFIC

Talbe 4: Sources of French Private Equity Capital Raised, 1994 – 1997

1994 1995 1996 1997

% of % of % of % of

No. total No total No. total No. total

Corporate Investors 227 6 145 5 183 4 1,186 28

Private Individuals 6 0 47 1 284 6 80 2

State Bodies 22 1 99 3 137 3 52 1

Banks 2,546 66 1,514 43 2,792 60 2,488 58

Pension Funds 170 4 535 15 381 8 188 4

Insurance Companies 656 17 670 19 718 15 245 6

Universities 0 0 0 0 88 2 0 0

Others 249 6 498 14 107 2 66 2

TOTAL 3,876 100 3,508 100 4,688 100 4,305 100

Source: AFIC

Table 5: Fund-Raising Patterns, 1993-1997

a) sources of capital raised, by geographic origin

994 1995 1996 1997

% of % of % of % of

FFrM total FFrM total FFrM total FFrM total

France 3,573 92 2,704 77 3,507 75 3,280 76

Rest of Europe 162 4 310 9 254 5 242 6

Rest of World 141 4 494 14 927 20 783 18

TOTAL 3,876 100 3,508 100 4,688 100 4,305 100

b) capital raised by type of fund manager

1994 1995 1996 1997

% of % of % of % of

FFrM total FFrM total FFrM total FFrM total

Independents 986 25 2,276 65 2,588 55 1,688 39

& Semi-Captives

Captives 2,890 75 1,232 35 2,100 45 2,617 61 TOTAL

3,876 100 3,508 100 4,688 100 4,305 100

Source: AFIC