French PE sees higher valuations in 2016 as dealflow drops

French deal volume and average value in 2016 reveals a slowdown in activity compared to last year. Admittedly though, 2015 was a particularly good vintage for French private equity.

General dealflow including buyout, early-stage and expansion has dropped from a total of 415 transactions at this stage in 2015, to 240 in 2016, according to unquote" data. Aggregate value has also dropped from €26.9bn last year to €23bn this year.

Looking at buyouts and expansion rounds in turn, the trend is consistent across both, with year-on-year aggregate values having fallen from €23.5bn to €20bn for buyouts and from €3.2bn to €2.6bn for expansion deals. Early-stage investors, on the other hand, have been slightly more adventurous this year, with totals increasing to €198.5m from €181.7m in 2015.

In spite of this trend, 2016 saw some major buyouts take place, with two deals above the €1bn mark. In June, Bridgepoint and Eurazeo sold their shares in real estate group Foncia to Partners Group for €1.8bn. Three months later, Advent International acquired Safran’s identification and security arm for an estimated €2.42bn, ahead of a merger with portfolio company Oberthur Technology.

"It is getting increasingly hard for firms to deploy their funds. As a result, some large-cap funds end up taking over some of the mid-cap deals, which wasn’t the case a few years ago" – François-Xavier Mauron, Edmond de Rothschild Investment Partners

Other noteworthy large-cap buyouts in 2016 have included the €700m re-acquisition of InfoPro Communications by TowerBrook in February; the sale of Ethypharm by Astorg to PAI Partners for €725m; Decomeubles' sale of retail chain But to Clayton Dubilier & Rice and WM Holding for an estimated €525m; and most recently the secondary buyout of Equistone’s Unither by Ardian for €675m.

The increasing number of large-cap buyouts in the French market brings two aspects to light: firstly, prices are hitting new record highs, as was recently reported by unquote"; and secondly, the French private equity market, traditionally more focused on the mid-market, appears to be shifting towards larger-cap deals.

"Very high prices are a constant aspect of the French market, regardless of macroeconomic trends," says François-Xavier Mauron, partner at Edmond de Rothschild Investment Partners (EdRip). He identifies two main causes for price inflation: intensifying competition among both trade and private equity buyers, and greater access to debt, marking the return of higher leverage reminiscent of the 2006-2007 period – a "rather worrying" prospect, in his opinion.

"It is getting increasingly hard for firms to deploy their funds,” Mauron says. “As a result, some large-cap funds end up taking over some of the mid-cap deals, which wasn’t the case a few years ago."

Even at the lower end of the market, pricing does appear to be on the up as well. Looking specifically at buyouts valued at less than €100m, the average value of deals recorded in 2016 so far stands at €40m – last year, that average enterprise value was around a quarter lower, at €29.6m per transaction.

Bright future
Regardless, the confidence among French GPs appears to remain high. Mathieu Antonini, managing director at Ardian, says: “2016 was excellent in terms of mid-cap buyouts. We made quite a few investments, with our fifth LBO fund now fully invested and Fund VI in the process of being deployed.

"The last term has been extremely satisfying, in spite of two determining elements in terms of macroeconomics [Brexit and Donald Trump’s election], which were both unpredictable to an extent," Antonini says. "We are quite convinced that the market will remain volatile, but there will still be potential for value creation."

Despite the upcoming elections, which often introduce a level of doubt and uncertainty for investors, EdRip’s Mauron also remains cautiously optimistic. "Calculating the budget for electoral years is traditionally always difficult, but things have felt different this year,” he says. "I think this is largely due to the fact that people don’t expect anything ‘groundbreaking’ from the elections and the political changeover. The wait-and-see attitude that was very much present in 2012 is not here this time, because no one is foreseeing negative outcomes or the stiffening of regulations for business-making."

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