Cautious optimism in France as government unveils pro-business policies

What a difference a year makes: in 2012, slightly more than half (52%) of the private equity professionals surveyed by Afic and Opinionway were confident with regards to future activity prospects. The 109 GPs polled in the second half of 2013 were much more bullish, with that figure rising to 76%. And although most (55%) are still worried about France's economic situation, this figure is a marked improvement on the previous study (71%).

After a fairly disastrous 2012 – both in terms of dealflow and political interference - last year indeed saw several developments more likely to put a spring in the step of local GPs.

In terms of activity, the overall volume of deals done in the country continued on a downward slide that began after a particularly busy 2011, with dealflow decreasing by 10% last year according to unquote" data. But this headline figure hides other more positive trends. First, the overall value of these deals increased by more than €3bn to settle at €11.3bn. This was no doubt helped by the fact that the mid-market buyout segment – an essential part of the local private equity ecosystem – rebounded in a healthy fashion last year: dealflow in the €50-500m segment increased by 40% in volume and 35% in overall value.

Policy shift
One of the factors influencing this uptick in confidence could be the improving relations between the business community and president François Hollande's government.

"The government's economic policies have evolved considerably over the past 12 months. The Assises de l'Entrepreneuriat initiative was unprecedented, and many of the decisions made then have been put in practice, with a strong focus on fostering innovation," says Louis Godron, partner at Argos Soditic and chairman of Afic. "The shift to a more ambitious supply-side policy initiated at the beginning of 2014 is also a much-welcome development."

President Hollande surprised many with his New Year's speech, announcing a "pact" with entrepreneurs that would see less taxation and less red tape in exchange for employment and investment pledges by businesses. Although the details still need to be ironed out, a large consultation on fiscal policy kicked off this week while further "simplification" measures will be announced in April.

This social democrat change of tack will no doubt assuage investors' fears - provided it translates into clear policies down the line. "The sentiment on the ground is cautiously optimistic, the economic outlook is better and the context is more business friendly. The various measures designed to cut down on red tape are likely to facilitate the decision-making process, and the fiscal scheme has been redesigned to facilitate dealflow," says Godron.

Caution definitely remains the word, though, warns Apax chairman and CEO Eddie Misrahi, echoing similar conversations with various French professionals: "This new orientation could boost confidence, but many will ask to see concrete results first before celebrating."

Challenges ahead
Should the planned measures bear fruit, finding the right investment opportunities will still remain a challenge in the coming months – even if mid-cap activity improved last year, the effervescence of 2011 is still a distant memory.

Says Misrahi: "Dealflow remains problematic: there are few transactions and, in particular, few primary investment opportunities. However, financing for any deal is not the issue as both banks and debt funds have sufficient capital and appetite. Funds that manage to invest in this environment do stand out."

Sentiment may remain divided when it comes to future activity levels, but industry participants share the same worries when it comes to fundraising: will the various measures designed to boost France's competitiveness – those already in place as well as those in the pipeline – translate to a greater appetite from international investors? "Fundraising should remain difficult: although Europe as a whole is attracting LPs once more, France's own attractiveness is still an issue, despite France remaining one of the largest private equity market in Europe," says Misrahi.

Once again, the track record of individual GPs will still prove the best weapon to overcome preconceptions about the country. Montefiore Investment, for instance, saw international investors provide half of the commitments in its latest fund last year, against less than a third in the previous vehicle. The GP eventually raised €240m, well beyond its €180m target. Looking ahead, the fate of PAI partners' new vehicle – which reached a €1.4bn first close in January towards its €3bn hard-cap – will act as a litmus test with regards to the attractiveness of sizable France-based vehicles.

The issue is particularly important given French institutional investors' current disaffection for the asset class, according to Godron: "GPs with an existing international base of investors are likely to navigate the market successfully, but it is increasingly complicated for those relying only on a domestic LP base. This is one area where we feel more could have been done in recent months as it remains a major challenge for French private equity: we absolutely need to better redirect the large volume of French long-term savings towards unquoted investment opportunities."

After showing much-needed signs of recovery in the past year, the French private equity industry now appears to be at a turning point. Will the government's new strategy make enough of an impact to boost confidence and kickstart growth, thus further encouraging dealflow? And will this positive dynamic entice both international and domestic LPs to back local GPs? Should "yes" prove to be the answer to these questions in the coming months, 2014 could be the year that French private equity fully reasserts its position in the European scene.

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