Global LPs boost French mid-market fundraising

Three French buyout vehicles held impressive final closes in this year's first quarter, amounting to around double the size of their immediate predecessors: Astorg VII closed on €4bn, Keensight V on €1bn and Five Arrows Principal Investments III on €1.25bn. Astorg's fund backs companies with a valuation in the €200m-2bn range, while the other two vehicles have a clear mid-market mandate.

The latest closes are confirmation that collecting €1bn in commitments is possible for a group of French mid-market GPs. In fact Sagard, Chequers Capital, Apax Partners and Alpha held similar closes in 2017, although closes by French mid-market GPs did not surpass the €500m mark last year.

The aforementioned 2019 fundraises were completed in a year, or less, and all benefited from the backing of LPs based in Europe, North America, Asia and, in the case of Keensight V, the Middle East. "Attracting an international LP base was, for the first time, an important goal during the fundraising process," Keensight managing partner Jean-Michel Beghin told Unquote at the time of the close.

A report by trade body France Invest suggests foreign LPs are increasingly backing the French market: of the commitments collected by the trade body's members in 2018, 48% came from foreign investors. This is a significant increase on the 31.5% and 20.4% seen in 2017 and 2016, respectively.

Attracting an international LP base was, for the first time, an important goal during the fundraising process" – Jean-Michel Beghin, Keensight

According to several sources, the macroeconomic outlook has played a vital role in boosting investor confidence in France since 2016. Triago partner and corporate secretary Fabian Mourgue D'Algue underlines that "although president Macron's popularity at home has declined in recent months, LPs are fairly optimistic concerning France and its prospects. Brexit remains the main issue in Europe in terms of political instability."

He adds that "with the outcome of the Brexit process unresolved, a significant number of international LPs wanting to allocate in 2018 and Q1 2019 avoided backing UK-focused GPs. Certainly some capital which normally would have gone to UK GPs went to French ones instead."

French large-cap GPs have been backed by international LPs for some years now, but mid-market players receiving such backing have traditionally been the exception rather than the rule. "As fund sizes have become larger, French GPs have found it makes sense to market their funds to LPs beyond France's borders to hit their fundraising targets," says Mourgue D'Algue.

Learning to scale up
The political context may be benefiting France, but mid-market GPs are also attracting foreign capital on their own merit, and have made efforts to adapt to a new fundraising paradigm. First, a number of GPs have started to be less France-centred and opted instead for a pan-European strategy. "Following the example of London-based mid-market GPs, which started to have pan-European strategies about 10 years ago, a number of French mid-market GPs recently adopted this approach," says a market insider. Finding a niche is also crucial: sources across the board agree that only mid-market GPs that have a differentiated investment strategy or a sector specialism have been appealing to international LPs.

French mid-market players have also learned to pitch more attractive terms. "French funds used to have lower hurdle rates, but French terms have evolved as the market has become more international. As a result, today French GPs are more competitive on an international level than they once were," says Mourgue D'Algue.

Several mid-market final closes are on the horizon, including Cathay Capital's Midcap II targeting a €1.2bn close and ArchiMed's MED Platform I looking for €800m. The latter manager is already wise to the opportunities that lie beyond France's borders: when MED Platform I held its first close in October last year, the vehicle received commitments from institutional investors and family offices, with a 50:50 split between the US and Europe; US LPs have always been present in the GP's vehicles, but their share of commitments has steadily increased with each fundraise.

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