Q&A: Robert Daussun, LBO France

Greg Gille: LBO France has been on a divestment drive recently, with several sizable exits and dividend recaps (see box, below). What were the factors behind the timing of this exit push?

Robert Daussun: We made a conscious decision not to sell during the crisis – and this was clearly explained to our investors at the time. The thinking behind this was that, although we had been disciplined prior to the downturn by sticking to entry multiples not exceeding 8x on average, we didn't want to be penalised by selling as the market hit bottom. Buyer appetite was low and liquidity was very limited, which would have had an impact on the valuations we would have been able to achieve.

When the rebound arrived in 2011-2012, we started focusing on our divestment calendar, initially on the real estate and small-cap portfolios. In 2013-2014, we moved onto the White Knight mid-market buyout portfolio. Today, the two elements that made navigating the worst of the crisis so tricky (a lack of visibility and a lack of financing options) are definitely less of an issue, and it is possible to do very well with good-quality assets. We have generated returns of 2x on average with the divestments we have made in recent months.

GG: Are you going to keep pushing on the exit front in the coming months, or will you focus on accelerating the investment activity?

RD: Overall, we have distributed more than €1bn back to investors in our White Knight buyout fund in the past 18 months, which is a significant achievement. This effort is mostly coming to an end now – while we still have a couple of exits in the pipeline, we need to take the time to develop the rest of the portfolio and create value.

On the buy-side, it must be noted that we actually remained pretty active throughout the crisis. That said, the next 12 months will indeed see us ramp up the investment activity. So far this year we have already done three deals on the real estate side, three transactions via our Hexagone small-cap fund, and one deal in the mid-market.

GG: What is your take on the current French buyout market, and do you foresee specific challenges as LBO France is set to deploy more capital?

RD: The French market has certainly picked up this year. Looking back, 2012 stands out as the true low point of the post-crisis period; we witnessed a definite improvement in 2013 already, and 2014 is so far looking even stronger. But this is all coming from a low point and the market remains difficult, mainly because it currently lacks depth. Look at the rebound in the first half of 2014: this was mainly driven by high-profile, sought-after deals in the upper-mid-market. This boosted the overall value statistics, but the volume of buyouts actually remains fairly lacklustre.

GG: Has this lack of depth, combined with more leverage and stronger buyer appetite, driven prices up? And is that a worry for you on the buy-side?

RD: Firstly, the French market remains comparatively less expensive than those that rebounded more quickly after the downturn – namely the US, the UK and the north of Europe. That said, we are indeed witnessing valuations slowly creeping up. The increased liquidity certainly plays a part; and in our relatively low-volume market segment, competition for the best assets can lead to prices spiralling upwards.

Now, is that a worry for us? Not really. I much prefer seeing a dynamic market – even if it sometimes results in higher prices – than a lifeless one. It is then up to us to remain disciplined (even at the peak of the 2006-2007 boom, we managed to buy at reasonable entry multiples) but at least we have options and a deeper market to explore.

Pricing really becomes problematic when competition is strong but the market is quite shallow, which to be honest is the case in France at the moment. But this is not set to last, and we are convinced that the improved market conditions will entice more sellers. This is true of private equity players, but also of corporates, and I expect to see primary deals becoming more plentiful in the next few months.

GG: You are clearly quite bullish on France's prospects – do you think this enthusiasm is shared by international investors, or does the country still suffer from something of an image problem?

RD: Let's face it, the perception of France beyond our borders is not as flattering as one could hope. This is definitely a handicap in our industry, where the need to attract international capital is pressing. Up until the past summer, we were seeing overseas investors, particularly from the US, once again looking at France and Europe in general as an attractive investment destination. Given the latest macro-economic developments, the overall mood changed in the past quarter, which is not a positive development.

We are isolated from this somewhat at LBO France, since we have long positioned ourselves as local players on the one hand (thus benefiting from in-depth sourcing opportunities), but targeting businesses clearly geared towards international expansion. In a nutshell, French GDP growth is not what we sell to our LPs. For example, with organic sales growth averaging 6.1% per year between 2008-2013, the White Knight VIII portfolio has well outperformed European and world growth.

And there are a number of sophisticated international investors, particularly those with a deep understanding of the European markets, who recognise that France has time and time again proved it can be home to great companies able to become international success stories.

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