H1 Review: GPs seek sourcing alternatives in busy French market

French activity in the first half of the year closely mirrored performance in H2 2018: 102 deals were completed with an aggregate value of €13bn, in line with the 109 deals worth €13bn recorded in H2 2018.

However, H1 2019 fell short of the corresponding period in 2018, when 120 buyouts were recorded with €20.19bn in aggregate value, mainly driven by deals valued in excess of €500m.

A slight slowdown was apparent in the mid-market space, which saw 64 transactions worth a total of €5.71bn, while both halves in 2018 posted a volume of more than 70 deals and an aggregate value of more than €7bn.

Several factors have been at play, among them the fact that PE lost out to corporate buyers on more deals than usual. This is apparent in exit figures too, with the proportion of trade sales increasing from 30% in 2018 to 35% in H1 2019, whereas SBOs fell from 39.5% of all exits last year to 34% in H1 2019.

A new kind of competition is also coming from infrastructure funds: Philippe Poletti, CEO of Ardian France and head of buyout activity, explains that these new players are now eyeing deals that in the past were traditionally backed by PE. Examples include the sale of cold sterilisation provider Ionisos by Ardian to 3i Infrastructure, and the reported purchase of PE-backed nursing homes operator Domidep to US-based infrastructure firm I-Squared.

Alternative players that entered the scene a few years ago are also now firmly rooted in the French market. "Long-term investors, such as the Canadian pension funds, are also in part competing in the large-cap space," says Poletti. "Having made inroads in the market a few years back, they have stayed." CDPQ and PSP were looking to acquire minority stakes in Webhelp before it was finally acquired by Belgian holding company Groupe Bruxelles Lambert in early July, for instance. On the other hand, Poletti highlights that these buyers are eventually a positive force in the market, as they are typically tertiary buyers and offer excellent exit opportunities.

Caution and alternative sourcing
Pricing remained relatively stable in the first half of the year, albeit at a high level. But buyers have become more selective, says Guillaume Jacqueau, managing partner and head of France at Equistone: "With debt options having considerably increased and debt being very cheap, GPs are keeping a close eye on the equity/debt ratio of the business they acquire." Equistone recently walked away from a potential deal as the business would have been over-leveraged, he says.

In order to adapt to the current competitive environment, some GPs have turned to minority-stake deals, despite traditionally being majority backers – and consequently boosting the growth capital figures in H1 (117 transactions versus 185 for the full 2018 year). Other GPs have found alternative ways of sourcing: "We expect to see more take-privates and carve-outs of listed businesses," says Poletti.

Despite the strong competition, Jacqueau remains confident about the French market's prospects: "A slight decrease in activity could simply be a consequence of the momentum seen in 2017-2018: I'm not hugely surprised. We don't see a drastic change in the quality of the kinds of assets we see."

On the fundraising front, the first half of 2019 appeared strong with €7.1bn collected by local players, already nearing the €7.77bn raised across the whole of 2018. H1's headline figure is spread across a smaller number of funds, however, with the impressive amount collected being mostly due to three final closes: Astorg VII closed on €4bn, Keensight V on €1bn and Five Arrows Principal Investments III on €1.25bn. Considering that last year, apart from the €5bn vehicle PAI Europe VII, all other funds were smaller than €200m, 2019 has so far been marked by the return of established mid-cap players.

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