French turnarounds suffer from narrow GP base

Greg Gille
26 April 2012

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As in most European countries, one could have thought that the morose economic environment would be a boon for French turnaround specialists.

But according to recent data released by PE association AFIC, turnaround and distressed activity only accounted for a meagre 1.2% of overall investments in the country last year. And while the aggregate value of turnaround deals increased moderately compared to 2010, dealflow actually slowed down by a third in 2011.

Yet France does have a few specialists operating in that area, including Butler Capital, Vermeer Capital and Perceva Capital. The latter closed its maiden €150m vehicle in January 2011 and has completed four deals since then, notably acquiring heating devices manufacturer Supra in a €12m take-private in August. Meanwhile Butler bought Anovo, a provider of after-sales support solutions for high-tech products, for €22m out of administration in November.

But does France need more turnaround players to bring the numbers up? "We indeed see very few turnaround deals being completed at the moment," ex-Butler and current Perceva president Jean-Louis Grevet told delegates at the annual AFIC conference, held in Paris on 12 April. "This is not due to a lack of opportunities, but to a lack of players."

He went on to explain that the hands-on, hit-or-miss nature of turnaround investing does not make it an easy market to penetrate successfully. "This is not a scalable activity; you need to be very local and average tickets, at €15-20m, are on the smaller side. You also need a highly-motivated team, able to spend at least one day a week in a portfolio company solving serious issues. The team also needs to deal with redundancy plans, relationships with local banks, employee committees, etc."
Oaktree Capital's Mathieu Guillemin also stressed that turnaround is not a job for the faint of heart: "You absolutely need to be local, and good at building consensus; not everybody can do this."

Deal announcements may be scarce, but turnaround specialists are by definition good at focusing on the silver lining. Although a tiny fraction of companies end up being bought, Grevet stated that Perceva was looking at around 100 potential investments per year. Meanwhile Oaktree sees opportunities in the refinancing segment - buying distressed debt and injecting new money - in which it operates: "The precarious LBO structures that have not yet been dealt with will create opportunities," noted Guillemin.

SJ Berwin's Nicolas Theys noted that France's sluggish growth was unfortunately leaving more businesses in need of last-resort capital injections: "We are seeing more businesses failing at the moment, and restructurings have been too timid since 2008." Time will tell if these opportunities, coupled with strong LP appetite for the strategy, will be enough to tempt more newcomers.