French fundraising: Sky-high ambitions

While 2016 witnessed fewer fundraisings than the previous year in pure volume terms, the sums collected by French GPs overall were greater. According to unquote" data, 22 funds were closed last year compared to 30 the previous year, while a total of €24.7bn in commitments were raised – a record amount that significantly exceeds the €9.8bn collected in 2015.

Some record fundraisings also took place, partly explaining the sharp spike in amounts committed. Leading the pool was Ardian, closing no less than three funds above the €1bn mark. The first was Ardian's Secondaries Fund VII, for which the GP raised $14bn, with $10.8bn dedicated to secondary investments. Expansion Fund IV then followed, closing in June with €1bn in commitments, significantly above its original €650m target. Finally, the GP wrapped up the year with LBO Fund VI, closing the vehicle on its €4bn hard-cap with an extra €500m co-investment pocket.

Astorg Partners was another GP that successfully hit the trail in recent months. For its sixth buyout vehicle, the firm raised a fund twice the size of its predecessor, Astorg V, with commitments hitting an extended hard-cap of €2.1bn. Launched in October 2015 with an initial target of €1.5bn, the substantially oversubscribed fund had already hit a first close on €1.7bn after only a few months on the road.

There is a clear opportunity for managers with funds in the €700m-1bn bracket, as there is consistent dealflow and a proven strategy to support this size of fund" – Scott Church, Rede Partners

This all suggests local GPs may be slowly shifting towards larger fund sizes, as was seen in the UK prior to the EU referendum in June last year.

Rede Partners co-founder Scott Church says: "While some managers may wish to increase the size of their future funds, typically they will pursue a strategy where they repeatedly outperform and will therefore maintain a consistent fund size that supports this strategy, albeit within a range. For example, in France, particularly as some firms have vacated this space to pursue pan-European strategies, there is a clear opportunity for managers with funds in the €700m-1bn bracket, as there is consistent dealflow and a proven strategy to support this size of fund."

Rede recently assisted France-based Apax Partners with its latest fundraising effort for Apax France IX, helping the GP secure a record €1bn in commitments. Launched in late 2015 with a target of €750m, fund IX is the largest ever raised by Apax; its predecessor closed on €700m in 2011.

Around 84% of Apax's previous investors recommitted capital to Apax France IX, and were joined by 20 new LPs. The LP base primarily comprised pension funds, funds-of-funds, insurers and family offices, with around 49% of contributors coming from France, 31% from the rest of Europe and 20% from North America.

"I do not see Apax France increasing much more than the size it is now, as the mid-market and the EVs that it is targeting is where the real opportunity lies," says a private equity professional who wished to remain anonymous. "It may well raise a larger fund, but in terms of investments I suspect it will keep applying a similar strategy."

Mixed performance
France may have seen its fair share of successful closes by a select few managers in recent months, but that is not to say that fundraising conditions have generally improved for all GPs, with some managers struggling more than others over the past year.

Says Rede's Church: "While the French market remains robust, as with all geographies, LPs are still particular about who they invest with. This is why, although LPs generally have a lot of capital to invest at the moment, they continue to scrutinise managers and look for those with compelling strategies and ideally a track record. Consequently, you still see different outcomes for different fundraises."

While stronger GPs will always attract interest (making the fact that they are France-based almost irrelevant), those less in favour will not have an easier time because the wider market is buoyant.

Talking to unquote" anonymously, an alternative investment adviser says: "Fundraising speed can vary a lot, and it all depends on track record. Funds such as Sagard or LBO France, for instance, recorded some unsuccessful investments, which reflected badly on their fundraises."

Around 2006, Sagard encountered challenges as it was raising capital for its second buyout fund, Sagard 2, which it had to reduce from €1bn to €800m. The GP's difficulties largely resulted from its unsuccessful investments in SGD, taken over by Oaktree in 2010, and Vivarte, taken over by Oaktree, Alcentra, GoldenTree and Babson in 2014.

While Sagard now seems to have healed from its bruises, having recently increased the size of Sagard III from €400m to €800m within six months by reopening subscriptions for the fund, LBO France has had a tougher time with White Knight IX.

After a failed launch in 2012, the GP kicked off the fund's roadshow in 2014 with an original target of €1bn. After three years on the road, LBO France finally held a final close earlier this year, with fewer than half the commitments it had aimed for.

In spite of some successful exits, including the sale of Mont-Blanc Materne to Fromagerie Bel for €850m that brought it 4x money last year, the GP is still reeling from its past failures with Terreal, taken over by creditors in 2013, and Winoa, picked up by KKR in 2013 through a recap.

Unfavourable tax regime
Rhonda Ryan, managing director and head of EMEA at Pavilion Alternatives London, identifies another issue that has impacted French funds' success: "Having looked at some fund managers, they have had a hard time deploying their funds – more so in France than in other countries."

For Ryan, much of this goes back to the capital gains tax changes introduced during president Hollande's mandate, which, according to her, meant business owners generally felt less inclined to sell their assets because of the incurred loss it could represent.

She says: "You need to have favourable conditions for deals to be done, and the negative tax changes we saw in the past [the tax changes were introduced in 2013] made it more difficult for French GPs to maintain a strong dealflow at the time."

You need to have favourable conditions for deals to be done, and the negative tax changes we saw in the past made it more difficult for French GPs to maintain a strong dealflow at the time" – Rhonda Ryan, Pavilion Alternatives London

As is seen elsewhere in Europe, having a strong sectorial or strategic focus is increasingly emerging as a key characteristic for a French fund's success. Armando D'Amico, managing partner at Acanthus Advisers, says: "The more competent and focused GPs are, the fewer issues they have with their fundraising. If you take Montefiore [the GP closed Montefiore Investment IV on its €420m hard-cap last summer, and is very highly regarded among LPs], it is typical of the type of funds that investors like: disciplined in their size and yet delivering high performance and with an angle of specialisation.

"At the lower end of the market, you usually have to be quite generalist; but at the higher end, sector specialisation really helps you stand out."

Says Richard Damming, executive director at Adveq Management: "We tend to look for up-and-coming specialist funds with a different strategy and a strong potential for international development. We have found them in many other locations, but in France we are yet to find these opportunities."

France vs the world
Looking at how France is perceived from the outside compared to its EU neighbours, and whether foreign LPs see it as a prime geography to commit capital, yields some interesting comparisons.
Says D'Amico: "France remains a very important market in the EU, but when you ask foreign LPs what their favourite place of investment is, they usually start with northern Europe."

Adveq's Damming adds that local GPs can also have a slightly nonchalant attitude to attracting foreign capital: "French funds tend to have a very strong local investor base; because of their abundant local funding opportunities, they do not feel the need to build a strong international investor base and, as a foreign LP, you sometimes get the feeling you are treated as an after-thought."

Damming, who oversees Adveq's investments in Benelux, France and southern Europe, says that, although his team considered several investments in the country this year, it had yet to "pull the trigger". Last year, Adveq took part in two co-investments in France.

According to Damming, the firm has not made any local primary commitments in a while, as finding the right group to back has proved a challenge in recent times. "French companies are traditionally very domestic in nature and rely heavily on the development of the local economy – which, incidentally, has not been the best lately."

Several sources indicate that markets such as the Nordic and Benelux regions have been delivering better returns recently, turning investors away from France, and some foreign LPs report having preferred doing investments in the country through pan-European funds, rather than through single-country ones.

French funds need to become more international in their view, both in the way they structure their funds and with regards to the sort of LP base they want to see in their funds" – Richard Damming, Adveq Management

Eddie Misrahi, chairman and CEO of Apax since 2010, acknowledges that in spite of the firm's success with Apax France IX, the fundraising pace was partially affected by France's reputation on the international stage. "Insofar as investors perceive us as a fund that mostly invests in France, we were slightly handicapped by the country's bad image in terms of tax regime, ease of doing business, and economic climate in general," says Misrahi. "Many investors told us they would rather be in a pan-European fund than in a France-centred one."

"We do not get too excited about GPs building a portfolio of local businesses that are all dependent on French GDP," says Damming. "We want businesses whose model can work internationally, and that can diversify the macroeconomic risk away. French funds need to become more international in their view, both in the way they structure their funds and with regards to the sort of LP base they want to see in their funds."

These challenges are, of course, compounded by the still unpredictable political climate in the country ahead of crucial presidential and legislative elections this weekend and in June. At the time of writing, centrist candidate Emmanuel Macron and far-right mainstay Marine Le Pen are setting off in the second round of the presidential election. On the one hand, Macron – a pro-business, pro-EU and moderate social democrat – is currently favoured to comfortably win the contest, which will no doubt assuage the fears of international investors dreading a Brexit- or Trump-like shock in continental Europe.

But the future landscape is not without unknowns, notably on whether or not Macron will manage to build enough parliamentary support in the June legislative elections. Failing that, French GPs on the fundraising trail could be facing a further five years of dealing with France's image as a mature but hard-to-reform, idiosyncratic investment destination.

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• Topics
• France
• Fundraising
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• France
• Apax France SA
• Ardian (formerly Axa PE)
• Adveq