Sino-French PE relations move forward

The interest of Chinese GPs in French businesses, and the advent of trade sales to Chinese corporates, have become increasingly common in recent years. On the buyout front, Fosun International acquired all-inclusive holidays specialist Club Mediterranée in 2015 and backed womenswear retailer Iro in 2016. Meanwhile, in terms of trade sales, KKR sold SMCP, which operates luxury clothing brands Sandro, Maje and Claudie Pierlot, to Chinese corporate Shandong Ruyi Technology Group in 2016.

Cathay Capital, a French GP founded in 2006 with assets under management of €2bn, was launched with a Sino-French-specific strategy. Since Cathay's inception, the GP has invested in startups, as well as small- and mid-cap companies, 40% of which were based in France, 10% in other European countries, 40% in China and 10% in the US.

Cathay's LP base is predominantly European, but Chinese LPs account for around one third of its current commitments, while US and Middle East investors have committed the remainder. Cathay's Chinese LP base is composed of sovereign fund China Development Bank, and Chinese institutional investors, including pension funds and regional funds Yangtze River Industry Fund and Hubei High Technology Investment Guiding Fund Management, as well as corporates and family offices.

When asked his perspective on the current state of Sino-French investment relations, Cathay's co-founder and managing partner Edouard Moinet says: "We are going to see more Chinese investments in Europe in the coming years, as the ecosystem has been structuring itself in recent years with the development of Chinese banks and the creation of a very professional approach to international equity investment."

Making its presence felt
Indeed, Sino-French private equity relations are far from a novelty, and the past few months have seen a continuous presence of Chinese investors, either as GPs or LPs. In terms of Chinese GPs investing in French corporates, Citic Capital, Fosun International and Star Platinum Capital have recently completed buyouts in the region.

Fosun and Star Platinum both acquired stakes in French retailers that have been struggling financially. In Q1 2018, Fosun bought Lanvin, the luxury couture house, after it had experienced losses of €18.3m in 2016 and around €27m in 2017, according to press reports. More recently, Star Platinum bought womenswear retailer Naf Naf from trade vendor Vivarte in a €52m deal. The carve-out took place in a re-focus operation of Vivarte, which underwent a restructuring process in 2014. Creditors agreed to write off more than €2bn of debt and inject €500m in a debt-for-equity swap.

We are seeing more European, as well as extra-European LPs being attracted by the developing potential of the French VC market" – Charles Daulon du Laurens, Idinvest Partners

Moreover, in November 2017, Citic Capital completed the buyout of Axilone, estimated to be worth in the region of €500-600m. Citic competed against Bain Capital and FountainVest in the second round of the sale process, as reported by Unquote sister publication Mergermarket.

French GPs on the fundraising trail have also wooed Chinese LPs: Sofinnova and Idinvest Partners confirmed their respective funds Crossover Fund 1 and Idinvest Growth Fund II have each received commitments from a Chinese backer. When discussing the backing of France-focused funds by international LPs, Idinvest's partner, Charles Daulon du Laurens, says: "Compared to even two to three years ago, we are seeing more European, as well as extra-European LPs being attracted by the developing potential of the French VC market."

Asked about Chinese investors, in particular, du Laurens suggests the country's institutional investors and corporates are seeking high-quality tech markets abroad, supported by the government's belief that China will become a global technology champion. In this context, Chinese LPs are becoming increasingly attracted to the high quality of startups developed in France and Europe. "In particular, they often look into committing to funds that invest in French companies that would then aim to expand into China and even merge with, or be acquired by, Chinese corporates," he says.

Earlier this year, Cathay, BPI France and China Development Bank announced the launch of a €1.2bn Sino French Midcap II fund, which looks to invest in medium-sized companies mostly in France and China. Cathay might well have initiated a strategy that is here to stay.

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