The problem with France

The French have a long tradition of protectionism, both with regard to their culture and their economy, or at least that is how they have often been portrayed. The protests against the contrat premiere embauche (CPE) have crystallised for many the ambiguity that afflicts the French mindset. The CPE was an attempt by Prime Minister Dominique de Villepin to reduce the number of young people out of work by making labour laws more flexible; businesses would be encouraged to create jobs for under-qualified 20-somethings while holding them on a two-year probation period. The vocal and furious reaction against such plans rests on the idea that this will lead to greater job insecurity for youths if they know they can be out of a job at the drop of a hat: “easy hire, easy fire”. It is only after the two years are up that they can enjoy full workers’ rights.

De Villepin is trying to drag the French economy into the world of 21st century capitalism. It was an acknowledgement in government circles that the days of jobs for everyone and for life are long gone. In short, the protests seem like a “non” to modern capitalism from the French people.

Adding credence to such a sentiment was a survey recently carried out by pollsters GlobeScan, which found that 50% of French respondents disagreed with the statement “The free-enterprise system and free-market economy is the best system on which to base the future of the world”, and just 30% agreed. Compare this to China, where 75% agreed with the statement.

It marks a rather severe change of position for the French Government, which is now being cast in the light of capitalist progressive (or capitalist aggressive depending on your point of view). Last year, de Villepin vowed to defend French identity by blocking any bid for yoghurt maker Danone by Pepsi (no bid came and apparently was never going to). The reaction to the rumours was extreme, most memorably from Patrick Ollier, the president of the economic affairs committee in France’s National Assembly: “I find it scandalous to see the jewels of French industry going overseas, especially under the banner of Pepsi-Cola, when we’re talking about Danone, the symbol of French dairy products and French quality.”

The French Government’s attitude has now even raised the suspicion of the EU, following the merger between state-owned Gaz de France and Suez following a bid for the latter by the Italian state-controlled Enel, a move interpreted by many as an attempt by the French Government to keep Suez out of foreign hands.


Similar accusations of insularity have been levelled at the French private equity market for years, and there is some evidence to back up such an accusation, in particular the regularly high number of secondary buyouts: according to CMBOR, France saw 41 secondary buyouts in 2005, more than double the number it achieved in 2004, but French GPs anecdotally put the figure nearer to 50%.

It has been a long-held idea by some that being a French firm gives you an advantage over non-French firms. It shouldn’t be too much of a surprise to anyone that being a domestic fund is going to give you an advantage over foreign ones: market and cultural knowledge are all-important factors when bidding for companies, especially those that exist in the mid or small-cap space. The argument goes that in France, being local matters even more than it does elsewhere.

“It is a difficult market,” says Sam Robinson, a director at SVG Capital, the fund-of-funds that contributes 75% of its money to Permira. “It’s political. If you go to Germany, the English language goes a long way down. Most CEOs will speak English. The French want to speak French and because most deals in France are mid-market, they don’t have a European outlook.”

For Robinson, it’s important to have a thorough understanding of the workings of French business culture. “We try to find people who are plugged into the French network. This sort of thing is important everywhere, but it seems more important in France: you have to have gone to the right school, got the right degree, been to the right grandes écoles. There is a glass ceiling. We tend to look for people who know how to approach the right sorts of people in the right sort of way. When we invest in funds that invest in France, we have to be comfortable they are populated with French people.”

It is generally the family-owned companies that are the most sensitive to cultural differences. The bigger company managers are more concerned about getting the cheque. It’s in this regard that domestic private equity firms had the edge of their foreign competitors, an important fact to bear in mind in what is a market dominated by mid-cap deals.

George Elliston, a partner at Close Brothers in France, says that selling to a trade buyer can sometimes be difficult. “There are two factors,” he says. “First of all, because there aren’t a lot of assets around, managers who have completed a successful LBO are rich and popular, so when a fund manager approaches them and says they should sell to a trade buyer, the manager can often say ‘over my dead body’ and prefer instead to do another LBO. Secondly, when you have international buyers there can be a wee bit of Anglo-Saxon hostility. Foreign buyers should tread a bit carefully and watch how they handle themselves.”

Home advantage

“Being French and operating under the AXA name gives us some help when we are competing with some foreign players,” says Dominique Gaillard, managing director of AXA Private Equity’s direct funds activity. “It’s important to have a strong cultural sensitivity when dealing with family-owned companies. We try to capitalise on this when we are bidding.”

AXA had a busy year in 2005, the highlight of which was the closing of its third buyout fund on €500m in February 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 with 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%. The fund focuses on mid-market leveraged buyouts and management buyouts, 70% to 80% of which will be in France, and 20% to 30% will be in Germany. The fund will target companies with an enterprise value of between €40m and €350m.

Astorg was another French firm that managed to close a fund in what was a record-breaking year for fund raising in France, with €20.5bn being raised, almost double the €11.5bn raised the previous year, and the highest ever in Continental Europe (the previous record-holder was Germany in 2004, when €17.9bn was raised). Astorg Partners, which specialises in small to mid-cap French buyouts, 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).

The firm began fund raising in 2003, reaching a €100m first close in September of that year. “When we started fund raising,” explains Xavier Moreno, co-founder and managing partner at Astorg, “the mid-market was perceived as crowded, so we were finding investors who were doubting whether to go for a country fund or a pan-European one. Between our first and last closing we had completed a number of deals and exits which answered a lot of their questions and showed them the positive aspects of a country fund and convinced a number of LPs that our fund was a good choice. We have invested around half of our fund and have already begun building up some good potential returns and are ready to scale up the investments for the next fund.” The fund has made one exit so far, a secondary buyout, the sale of Mecatherm, a French manufacturer of industrial baking equipment, to Alpha Associates.

On the topic of domestic funds versus foreign funds, Moreno agrees the balance is tilted in favour of the former. “There are some non-French firms that have done well in France, but it’s a cultural business and the success of some, like Barclays Private Equity, is more down to the personality and characters of the team rather than the image of the large institution. It’s a people business and it helps to prove that you are making the decisions yourself based on local factors, and that they aren’t being made by some foreign committee.”

This is quite different from saying that French firms have an advantage. On the contrary, some of the most successful funds operating in France have been foreign. The key word GPs keep bandying about is “flavour”: as long as a firm has a French “flavour”, it doesn’t matter where they are headquartered.

The cultural difference is, for Moreno, based on a peculiarly French approach to the world of work and finance. He says: “If you take a broader view of Europe, the UK has been the pioneer. The City and the whole financial mindset is something that is ingrained in the British. They live like that and they invested most of it. Most of the companies in Germany are family-owned and they want to keep their company in their own hands and out of private equity funds. France is somewhere between the two. The owners in France always explain how they are not expressly driven by money. The idea of value creation is making its way through French managers’ minds.”


Where cultural differences appear to matter less is at the top end of the market. There are numerous examples in the last 12 to 18 months of US and UK firms buying large French companies. In March, the €3.7bn Rexel deal was completed, led by Clayton Dublilier & Rice, and not a whimper was heard from the media or politicians, despite Rexel being one of the world’s leading distributors of electrical equipment and supplies, with a network of 1,700 sales outlets in 29 countries and 21,000 employees and annual revenues of €6.8bn.

And let’s not forget Legrand, the current IPO star of the European public markets. This was owned for almost four years by another US firm, KKR, along with France’s own Wendel Investissement. At this sort of scale, it tends not to matter where the buyer is from; it just matters how much they can pay and what they can do to improve the company.

As well as Rexel and Legrand, there was casino operator Moliflor Loisirs, which was acquired by Bridgepoint last year for an undisclosed sum in a tertiary buyout from Legal & General Ventures (LGV) and Royal Bank Equity Finance, formerly Royal Bank Private Equity (RBPE). LGV and RBPE acquired Moliflor Loisirs in March 2002 from, PPM Capital (then known as PPM Ventures) in a secondary buyout transaction for a price in excess of €400m.

Frans Bonhomme, a distributor of PVC pipes and pipe fittings, is also in the hands of the British, sold by Apax to Cinven in a €900m deal. Frans Bonhomme is a veteran of the private equity merry-go-round. In 1994, a consortium of Fonds Partenaires, Apax and Gaz et Eaux acquired the company from Bollore Technologies for US$235m. In 2000, a management-led investor group backed by Cinven, Paribas Affaires Industrielles and Astorg acquired it for US$340m, and in June 2003, Apax Partners and Goldman Sachs acquired the company for €520m (about US$600m).

This is not to say that French firms are unable to compete on

the large scale deals. One of the biggest deals of the year was Saur, a water distribution, sanitation and waste management group. It was acquired by French firm PAI Partners in a deal worth just over €1bn. PAI Partners fended off opposition from Candover and Goldman Sachs in a joint bid, as well as Terra Firma, BC Partners and CVC Capital. Another of the larger deals was the sale of Terreal by Carlyle and Eurazeo to LBO France for an enterprise value of €860m. The €660m sale of Actaris by Montagu Private Equity back to previous owners LBO France in a tertiary saw another of the big deals of the year won by a French firm.

Below the level of the mega-deal (which France has traditionally been short of), and where the bulk of deal flow operates, is the mid-market, and it is here where having the aforementioned “French flavour” is essential.

“Private equity has to be sensitive to the way French companies work,” says Close Brother’s Elliston. “The feeling in the country is that the French run their affairs in a certain way and the Anglo-Saxons run theirs in a more financially liberal fashion, but some of the most successful firms in France aren’t French, but their offices do have French heads. There are a few firms who have offices here who don’t have a French look to them, and I think that is a handicap because a management team looks around and would rather be bought by a French fund than a foreign one.”

Stanislas Gaillard, an investment director at Barclays Private Equity (BPE) in Paris, is vehement in his defence of charges of protectionism against the French private equity industry. The French office is a subsidiary of Barclays Private Equity, and has a completely separate decision-making process from the parent. While all the offices of BPE draw money from the same fund, Barclays Private Equity European Fund II, a €1.6bn vehicle which closed in 2005, there is no set limit on how much each of the country teams get, and it matters not one bit that BPE is related to an English bank.

“Not at all, there is no problem with that. Everybody knows in France that private equity houses can be financed with funds from England or France, it doesn’t matter. Protectionism is more of a political view expressed in newspapers as regards large industrial transactions rather than a real state of mind of French business men. If you are talking with company owners, it comes down to economic reasons and therefore would not make any difference.”

The nationality of the firm is not really relevant. The nationality of the people in the office is more so, but ultimately it is more about understanding the local business culture. While some may argue it is a more difficult market to penetrate than some others because of its parochial nature below the large-cap deals, the problem, rather, is not with the nationality of the fund, but with the perception, or misunderstanding, of private equity itself.

Barclays’ Gaillard says: “Private equity houses still have to communicate their positive impact upon the economy. If there is a reluctance to sell it is more about the feeling some people have that private equity is just about making money and limiting a company’s expenditures or expansion program. The key challenge in 2006 is to strengthen the dynamic and positive image of private equity in France, not to fight against protectionism.”