France: strong deals pipeline fuels high average entry multiple

France was home to 204 buyouts worth a combined €38bn last year, according to Unquote Data. Although down by around 6% year-on-year in volume terms, these figures certainly do not look out of place when compared with the rest of the post-2015 period – if anything, aggregate value reached an all-time high in 2020 thanks to a handful of mega-deals including Ceva Santé Animale and Elsan. But the fact that this was achieved against the backdrop of a pandemic that threatened to completely upend the market early in the year is nothing short of spectacular.

"The thinking early on was that the market would completely freeze, but these fears were pretty quickly assuaged," says Thomas Gaucher, managing partner at Clearwater International France. "We continued to work on several processes even during the first lockdown, with a number of virtual closings."

While numbers did take a hit in Q2, a glut of deals therefore crossed the finish line in early summer and, following the traditional August lull, dealflow picked up again despite a second wave of restrictions to finish Q4 on a high. As a result, France remained the busiest PE market in Europe last year, especially as the UK continued to lose market share.

This was particularly evident at the upper end of the market, which remained more buoyant than ever in the country as sponsors fought tooth and nail for prized assets in defensive sectors such as healthcare (Elsan), higher education (Galileo) and financial services (CEP).

Onward and upward
With vast amounts of dry powder accumulated in recent years, sponsors targeting French assets have remained aggressive in processes, meaning that pricing continued on an upward trend even as Covid-19 hit. "It certainly seems like the market has gone up by two turns of EBITDA in the past couple of years, meaning that comparables are almost always on the low side" says Gaucher. "Looking at the past year, processes remained pretty aggressive, and not just because of the sell-side banks – buyers are very keen on pre-emptive offers to snap up the best assets, and this doesn't mean that they will pay less."

Gaucher adds that Clearwater has tracked no fewer than 16 mid-cap processes valued in excess of 15x EBITDA in France in the past year. Unsurprisingly, the glut of these were in the healthcare sector – where increased competition from cash-rich infrastructure players on the lookout for fresh opportunities has contributed to heated processes.

A look at 2020 activity against longer-term trends highlights how the PE market shifted in the wake of the pandemic – and where it is likely to continue heading as uncertainty looms large on 2021 prospects. According to the Heatmap data, industrials accounted for 28% of dealflow in volume terms across 2018-2019, with healthcare at 6% and technology assets at 15% – last year, a quarter of French buyouts (25%) were in the tech sector, healthcare's market share rose to 8%, and industrials fell to 23% of all dealflow.

Covid-19 basically acted as a real-life crash test for portfolios across the board, and those that passed it with flying colours will continue to attract strong valuations and therefore tempt sellers" - Thomas Gaucher, Clearwater International

Testing the waters
On the sell-side, PE players seem to have been more cautious. Exit activity for French assets was down by nearly a third year-on-year, according to Unquote Data, while realisations took less of a hit in other European regions such as DACH or the UK.

However, this merely reflects a sharp bifurcation in the market, Gaucher notes: "There were two clear trends: on the one hand, a number of processes for portfolio companies were indeed postponed as sponsors wanted to assess the damage and potential way out, in order not to crystalise losses and take a hit on returns. But for those that weathered the storm, or even benefited from it, sponsors didn't hesitate to bring timetables forward and take these companies to market, with strong results. Covid-19 basically acted as a real-life crash test for portfolios across the board, and those that passed it with flying colours will continue to attract strong valuations and therefore tempt sellers."

Looking forward, the French market remains in a fairly strong position – especially as the country is rich with standout, mature businesses in the healthcare, technology and services spaces. However, the Covid-related picture remains very uncertain: while the promise of a vaccine rollout should embolden market participants, the rapid rise in cases linked to more potent variants could hint at yet another damaging lockdown on the horizon.

But Gaucher remains confident that sponsors will feel buoyed by their resilience in recent months: "I believe that the more encouraging, medium-to-long-term prospects will prevail over short-term uncertainty. GPs know they can transact even in the middle of a complete lockdown, and are therefore still displaying a strong appetite to invest."

This article is an extract from the latest Clearwater International Multiples Heatmap report, which can be downloaded here

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