French private equity investors running out of cash

AFIC chairman Louis Godron had already rung the alarm bells in an interview with unquote" last July – now France's private equity association has produced the numbers to back up its warning. According to data compiled from its members, four in 10 GPs have less than 19% of their funds under management (FUM) left to be deployed in new investments, leaving them in a "critical" situation. These GPs have an average of just 9% of FUM left to put to work – effectively just enough for follow-on investments – rendering a significant number of GPs virtually incapable of making new deals.

Another 40% of the 125-strong sample has on average less than a third of its capital left to deploy. These investors are therefore faced with a pressing need to raise new vehicles – a task which will unfortunately see them run into another disquieting phenomenon highlighted by recent AFIC studies.

For four years in a row now, French GPs have been investing more capital than they have raised (see chart, below), effectively eating away at the dry powder accumulated before the 2008 crash. Although this shows that France is still ripe for private equity investment opportunities, it does also highlight that local fund managers are struggling to attract LPs – not good news for those GPs that are faced with the double ticking clock of looming investment period deadlines and low levels of dry powder.

Record low levels of dry powder and scarcer LP commitments spell trouble for French GP base

Last year was particularly tough in this regard. According to unquote" data, local fund managers raised around €2.4bn of fresh capital overall, but deployed close to €5bn – and this was a particularly dire year for French private equity activity by historical standards.

Of course, fundraising is lumpy by nature and the numbers do not tell the whole story. A lean 2012 followed a strong 2011: that year's first six months notably saw a power trio comprising Apax France, Chequers Capital and Astorg Partners raising well in excess of €2bn between them. None of these players have so far deployed their funds on a large scale, which at least points to a healthy supply of equity available for mid-market businesses in the coming years. These are representative of the last portion of the sample studied by AFIC: the 20% of GPs left with 58% of FUM on average ready to be invested.

Darwinism at work
The fact that so many firms are now vying for a limited amount of capital does highlight how far the French private equity industry has come in the past decade. This is testament to the depth of investment opportunities available in the French economy as well as the attractive returns generated by local GPs prior to the downturn. But the flipside might be that – as witnessed throughout Europe – too many players entered the game without a stand-out strategy and positioning. Times are likely to get tougher for "me-too" funds lacking a strong track record. It is no surprise that the quickest and most successful fundraises done in the past couple of years were led by established GPs with a strong brand.

Cynics might argue that the sword of Damocles held above such a significant portion of the French GP base will ultimately prove beneficial, thinning down the pack to be left with a standout selection of GPs more likely to appeal to picky international investors. Unsurprisingly, AFIC warns of the dark side of this private equity Darwinism: the fact that a reduced GP base might not be enough to meet the needs of the recovering French economy, and that many small teams with a role to play at a local level or in very specific investment situations are likely to disappear for good.

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