Secondary buyouts were the most popular form of exit in the French market last year, and almost half of all buyout transactions were between private equity firms. Tom Allchorne reports on a popular market that loves to recycle.
The last two years has seen a number of players crowd into the French market, leaving many either bemoaning the increasing levels of competition or scratching their heads as to why the market is so popular. A stable macro-economic environment and the failure of Germany to live up to its hype meant firms flocked to France to get a piece of the action in 2003 and 2004. And, when looking at the exit stats, it does initially appear that this enthusiasm is justified.
According to figures released by AFIC, the French private equity association, and PricewaterhouseCoopers in March this year, 2004 saw the total number of exits rise by 19.4%, from 897 in 2003 to 1,071. In terms of the total value of exits, this too had climbed, from €2.157bn to €2.739bn, an increase of 27%.
Competition remains high in France, and while deals don’t come cheap, it isn’t according to the GPs there, out of control. One of the most expensive deals last year was Wendel Investissement’s takeover of Bureau Veritas. France has never really been a place where mega-deals have taken place, the €4.9bn Legrand deal of 2002 was something of an anomaly, but 2004 saw a number of plus €1bn transaction. Bureau Vertis is a certification and classification business, and Wendel, which co-led the Legrand deal, increased its 32% share to 66% in the certification company. The acquisition cost €1.345bn; €645m from Wendel’s own funds and a €700m loan from the Royal Bank of Scotland. Poincare Investissements, a French investment firm, sold the shares.
Vivarte was another €1bn deal and a high profile one, which saw the French shoe and clothing taken off the stock exchange and into the hands of PAI Partners in a €1.2bn transaction. PAI took a majority of stake in the company, which CVC Capital was also reported to be interested in buying, and Sagard is rumoured to be in talks to buy a minority stake. PAI has also been involved in another mega-deal this year, the purchase of Saur, a leading water distribution, sanitation and waste management group, from Bouygues. Although announced in November, it closed in February this year. The bid was reported to be over €1bn, and was enough to put PAI ahead of rival bidders Candover and Goldman Sachs in a joint bid, as well as Terra Firma, BC Partners and CVC Capital.
Of a similar price was the €1.31bn secondary buyout of Picard Surgeles. Candover sold the frozen food retailer, to BC Partners in October. The sale saw the Candover 1997 Fund making over a 2.7x return on an investment made in February 2001 when the fund, along with Chevrillon & Associes, led a €920m MBO of Picard from Carrefour, the French retail giant. Montagu and Astorg were also part of the consortium. The decent return is down to the significant growth Picard experienced under Candover’s management. In 2000 the company’s turnover was €556m; on March 31, 2004 it reported a figure of €747m. Its EBITDA was similarly increased, from €82m in 2000 to €109m in 2004.
There are a number of issues with the Picard deal that touch on important areas in the French market. The first is that Candover recapitalised Picard seven months before selling it, making it one of many deals in France, and indeed Europe, to be recapped within 18 months of being purchased or sold. The second is that Candover was, before the recap, considering floating Picard on the Paris stock exchange, but scrapped the idea due to lack of investor demand. The IPO market in France is all but dead. Last year, according to the Centre for Management Buy-Out Research (CMBOR), saw two exits by way of IPO. Two more than in 2003!
The third factor is to do with BC Partners’ rivals in the chase for Picard: Cinven, Eurazeo, PAI and KKR and not a strategic buyer in sight. Secondary buyouts (and tertiary) were arguably the defining characteristic of the French market last year. CMBOR records 18 exits through secondary buyouts, making it the most popular form of exit in France, with 11 trade sales taking place. Chequers Capital says over 40% of buyout transactions last year that were over valued at over €20m were secondary buyouts.
Pass the parcel
Secondary buyouts in France are nothing new. Christophe Garaud, a partner in the Paris office of Willkie Farr & Gallagher, says he worked on a secondary buyout of NeoPoste: “I did this in 1997 when I was a young associate and this was not extraordinary at all, but certainly the number of secondary deals has increased recently. The reason is that most of the LBO sponsors have a lot of money to invest and raising debt is not difficult. There are all these players out there with a lot of money.”
Mark Foulds, a director in Duke Street’s Paris office, says: “Potentially this is quite a controversial subject. For people to think it is just a game of pass the parcel is wrong, and if there are people doing that then they are playing a risky game. We are going to keep on seeing secondary and tertiary transactions because people go to where the money is and the money is with the private equity firms. The stock market has no liquidity, so does not provide an exit opportunity and trade buyers weren’t really there so secondaries were the logical route.”
Secondary buyouts are of course not a French idiosyncrasy, but given the way the French market was being hyped up at the beginning of last year, the lack of trade buyers and IPOs is something of a disappointment. It’s not just the amount of money and ease of leverage driving trade between private equity funds. Charles Diehl, founder of Activa Capital, a firm that operates at the lower end of the mid-market, says: “I think trade buyers are around and there have been a few deals recently where trade buyers have outbid private equity houses, but for a lot of trade buyers buying a French company is still quite complex. For private equity houses it can be tempting to exit quickly to another private equity house. The absolute return may be lower but with a secondary there is less hassle and less risk.”
As ever, there are concerns from LPs over GPs selling to each other, taking fees and carry while the LP potentially ends up having the same asset in their funds portfolio. Dominique Gaillard, managing director of direct funds at AXA Private Equity, says: “There were concerns a couple of years ago about secondaries from LPs. Now I think most of them understand that it is something which is going to happen and GPs have continued to show they can get results.”
Andre Jaeggi, managing director at Adveq, is not so sure they can. Adveq is invested in four French funds. Jaeggi says: “We are viewing secondary buyouts very carefully, and I see it as a sign of an over heated market. There are of course secondary buyouts that make sense. Smaller niche players selling to a pan European player makes perfect sense, but the problem with a lot of buyouts is that this doesn’t happen, and assets are traded between funds of a similar size. Financial buyers sell to another financial buyer and then they have to sell, so what’s left? When you see that around one third of M&A transactions are secondary buyouts I would be rather cautious.”
Jaeggi is in agreement with Diehl over the difficulty of buying French companies: “In France we have a rightist government and yet it’s a very politicised and unionised market and you still see the government interfering by saying that some companies should remain with French owners. This makes it a very difficult market for exits. As soon as you have companies that are geographically in the backyard of a politician, or are considered to be sensitive to the French economy or there is an election coming up it makes it extremely difficult. We have seen situations where some of the big pan European groups try and rescue things by talking to the unions. It becomes difficult when politics gets involved.”
But politicians have got involved. In September the finance minister Nicholas Sarkozy received a boost in his bid to become the next president when his attempts to ‘encourage’ life assurance funds to invest in alternative assets paid off. The Federation Francaise des Societes d’Assurance, the private insurers’ association, and the Groupement des Enterprises Mutuelles d’Assurances, the mutual insurers’ body, revealed that life assurance funds were going to invest an extra €6bn in private equity over the next three years, increasing investments in non-listed companies from €14bn to €20bn by 2007. French insurers only invest around 1% of the €1000bn they have in private equity, compared to between 4% and 7% of US pension funds and between 4% and 5% of UK insurers.
This wasn’t the voluntary announcement it appeared to be; Sarkozy had threatened the life assurance funds that unless they made the move themselves, he would force them to do it by stipulating it in last year’s budget, apparently. Although small business and AFIC welcomed the move, others remain sceptical. The biggest fear is that the market will be flooded with cash, cash it doesn’t need. Foulds says: “There is clear risk that more money in the market will create additional pressure on people to invest in and we are in a sector where there has been a general decline in return expectations.”
The new money will also put more pressure on private equity funds to invest, something French firms don’t need. With competition at a high level from the upper-cap right down to the smaller end, funds are having no trouble investing the money they already have. According to CMBOR, 2004 saw almost €11.9bn invested, up from the previous year’s total of €8.8bn, but lower than 2002’s €15.6bn, but that year was distorted by the large number of mega-deals like the €5bn Legrand acquisition. Aside from 2002, last year saw the most money invested in the French buyouts market ever. In terms of the number of transactions, the year’s 150 is bettered only by the 155 buyouts in 1998. Of those deals over €250m, a record 16 had a value of over €250m. Add to this the three plus €1bn deals in a market that has traditionally lacked mega-deals, 2002 aside, and it appears obvious that the French market is not lacking in money. The fear is that with €6bn potentially flowing into the private equity market over the next two- to three-years, the pressure on GPs to invest money could lead to an increasing number of poor investments.
Some are not particularly worried by the life assurance funds’ decision. Diehl says: “This was a move really designed to get insurance companies investing in more high return asset classes. This was not the private equity industry in France saying they are starved of capital.” The agreement is not legally-binding and nor did it stipulate that all the money would be heading from the French market, and part of the government’s motivation behind exerting pressure on the life assurance funds is for more money to seep into venture, not just buyouts. But the fact remains that traditionally the natural step for an investor moving into a new asset class is to stay close to home until experience, returns and so forth give it the confidence to move further afield in search of greater diversification. February this year saw the first concrete move by a French institutional investor. Fond de Reserve pour les Retraites (FRR), a pension fund, has advertised for consultants to help it choose managers to allocate money in private equity.
Fund raising in 2004 was static, with €2.241bn raised, according to figures released by AFIC and PricewaterhouseCoopers. This is a slight decrease on the previous year’s total of €2.36bn, and was significantly lower than the previous three years. Dominique Oger, president of AFIC, says this is because private equity firms had other priorities last year: “The future of the industry in France now very much depends on the fund that will be raised in 2005/2006. Fund raising in 2004 was very low. The private equity teams have focused more on realisations to prepare for fund raising in 2005/2006.”
A number of funds have already closed this year. In February AXA Private Equity closed its third buyout fund on €500m after fund raising for three months. A number of LPs returned to AXA LBO Fund III from predecessor funds, although there were some significant differences in the make-up of the investors. For the latest fund the weighting of commitments from pension funds had increased to 28% compared to 18% for the second fund. The weighting for family offices remained at 9%. Commitments from French investors fell from 56% to 27% while the figure for UK and Swiss investors has almost doubled, from 18% to 35%. As with the previous two LBO funds, this one will focus on mid-market leveraged buyouts and management buyouts, 70% to 80% of which will be in France, and 20% to 30% in Germany. The fund will target companies with an enterprise value of between €40m and €350m. The fund has made two investments so far, the ?200m acquisition of Camaieu, a French women’s clothing retailer, in January, and Larivière, distributor of roof products, in March.
In April Finadvance, the small cap and mid size French buyout investor, has its third fund, Finadvance Capital III, on €82m, ahead of its €75m target. Calyon acted as placement agent on the fund raising which saw capital raised from fund-of-funds (35%), pension funds (23%), insurance companies (18%), family offices or private investors (14%) or from banks (10%.) The firm’s strategy is to invest in majority stakes in businesses with enterprises values of between €5m and €40m, with the average equity investment being in the region of €5m.
Also in April, Astorg Partners, another small to mid cap firm, closed its third fund, Astorg III, on €300m. The fund raised money from 17 institutional investors, which included AIG (US), Adam Street Partners (US), AXA (France), CDC (France), Fortis (Belgium), Invesco (US), Landsbanki (Iceland), Morley (UK) and Scottish Widows (UK). Astorg began fund raising in 2003, announcing a close of €100m in September of that year. Global Private Equity assisted it in the fund raising process. Astorg II, which raised €185m in 1999, was fully invested at the end of 2002. Three investments have been made by Astorg III so far: ECM, a manufacturer of heat treatment equipment used in processing metallic parts for the automotive industry; Mecatherm, which makes industrial bread making equipment; and CIS, a provider of water metering services for property owners and facility managers.
Joining this will be the funds raised by the pan European players, like the €1.7bn Carlyle Europe Partners II, which closed in March, Barclays Private Equity’s €1.65bn vehicle, which closed in February, Doughty Hanson’s Fund IV, which raised €1.6bn in January and Industri Kaptial’s €825m 2004 Fund, which closed in February. PAI Partners has just closed a €2.675bn fund after seven months of fund raising. The size exceeds its €2bn target and, according to reports, the fund could have topped €3bn but the firm decided to cap it. PAI Europe IV will invest in companies in Western European with a transaction size of at least €300m.
ABN AMRO Capital France is currently fund raising. The firm began pre-marketing for ABN Amro Capital France 2005 in March for a €250m generalist fund, which it hopes to close before the summer. It is the French arm’s third fund, the previous two havimg vintages of 1998 and 2001. CVC, BC Partners, Apax and Bridgepoint are all fund raising or plan to soon, and KKR and Advent International are planning to launch European funds as well.
The year so far
This year has started off much like 2004 in that things have been fairly quiet on the deal front, although already there have been two deals worth over €1bn: the aforementioned Saur deal and the Rexel transaction. The €3.7bn purchase of Rexel by a Clayton Dubilier & Rice-led consortium was announced and agreed towards the end of last year but was not completed until March. Rexel is an electrical distributor and was a subsidiary of Pinault Printemps Redoute (PPR.) Clayton Dubilier & Rice, Eurazeo and Merrill Lynch Global Private Equity acquired 98.5% of the business. PPR sold its 73.5% equity interest in Rexel to the investor group, following which an additional 25% was acquired from minority shareholders. Reports suggest CD&R has invested €603m, Eurazeo €587m and Merrill Lynch €458m.
There have also been a number of secondaries, something no one in the French market is expecting to go away this year. In April Barclays Private Equity and Perfectis Private Equity sold Cameca, a manufacturer of semi-conductor metrology equipment and scientific instruments, to Carlyle for an undisclosed sum. Carlyle now owns a 100% stake with management in Cameca. The Barclays Private Equity France fund and Perfectis I acquired an 80% stake in the business in 2001 in a €38m MBO.
In March Barclays was involved in a tertiary deal when it bought Laho Equipement, a construction equipment rental group, from Industri Kapital for €110m, generating a 2x return on initial investment, according to sources close to the deal. Industri Kapital 2000 bought an 80% stake in the company in June 2000 from a consortium of investors led by Bridgepoint Capital.
February saw another example of a fast recap when Doughty Hanson refinanced Saft, the designer and manufacturer of high-tech battery systems for industrial applications, earning investors in Doughty Hanson & Co IV €175m. This works out at a return of over 10% of total commitments to the fund, a 1.5 multiple and a gross IRR of 43%. Doughty Hanson bought Saft from Alcatel in January 2004 in a €410m deal, the firm’s first private equity purchase in France. A sum of €120m of equity was invested along with €290m of debt.
It is likely that recaps and secondaries will remain popular forms of exit in the French market this year. The return of trade buyers continues, but it’s more of a trickle than a flood (there were 13 such sales last year, down on the 16 in 2003), although they have begun to appear more frequently in auctions this year. But while the trade buyers remain hesitant, the stock market remains firmly shut, and debt remains plentiful, returns will be generated by selling to rival firms or refinancing a business. How long LPs will stand for this is another matter.