UBS's Fabrice Scheer on the French mid-market

Greg Gille
28 October 2013

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Fabrice Scheer, head of the corporate advisory group at UBS France, shares his cautiously optimistic view on current French mid-cap trends with Greg Gille

What are your views on the mid-cap LBO market in France so far this year?

One could say the market pretty much flat-lined until the third quarter – and this is pretty obvious when looking at activity figures between September last year and the end of July. Most people looking to sell assets and generally move capital in the mid-market instead sat still, discouraged by a backdrop of worsening macroeconomic indicators and tough trading conditions for many businesses. Overall, we saw very few new processes started – a few got underway but most failed to meet vendors' expectations.

That said, we did start seeing the first signs of movement in the market in mid-June. Our own dealflow at UBS is pretty telling in that regard: we signed more new mandates between July and August than in the first half of the year.

What are some of the drivers behind this uptick?

The businesses that we saw coming to the market at the beginning of the summer are the ones that – by a combination of talent, luck and clever positioning – are in a sufficiently strong position to entice their shareholders to finally make a move. This has remained true so far in Q4, with a more ambitious attitude from entrepreneurs and financial backers leading to a timid uptick in dealflow.

Another factor that certainly helped, and will hopefully persist, is a more positive outlook on macroeconomic trends. The downturn is still being felt, but the consensus is that things are moving in the right direction. This might involve a measure of wishful thinking, but the effect is undeniable: buyers are more eager to deploy capital and shareholders looking for liquidity have the sentiment that the window of opportunity is opening again.

One could think that France is perhaps still suffering more than the US or even the UK, though...

It is undeniable that most businesses overly dependent on the French economy will keep struggling. Consumer demand keeps falling, so does the construction sector... Internationalisation is key for an asset to become an attractive target, and this is a major component in the deals we are currently working on.

Those SMEs that are operating in sectors where a significant part of the demand originates abroad are the ones that are currently enjoying better prospects. This is clearly a positive development, as it would have been really difficult to get transactions done in these same sectors between September 2012 and June this year.

So all in all, we are seeing Q4 start on contrasting notes. Things remain tough, but the more optimistic players could say that 2013 will be the low point, paving the way for more positive developments in 2014.

Is that more positive atmosphere in the market translating to more appetite from GPs on the buy side?

You have to keep in mind that we are slowly coming out of a drought that lasted for almost two years, with dealflow suffering from mid-2011 onwards: virtually all of the funds that are sitting on dry powder are behind on their investment schedule. At the same time, a number of GPs are now more confident in marketing new vehicles to foreign investors following a tense few months in the wake of the 2012 elections.

In addition, it is tough to argue that today, financing is an obstacle to deal-making. As seen elsewhere in Europe, banks are there for the right deals and alternative lenders are really making a strong push, with unitranche in particular becoming increasingly prominent in the French mid-market.

These combined trends are also why we are currently pushing shareholders to think about potential deals: for those – admittedly few – businesses that are enjoying strong fundamentals and are on the right side of a very bifurcated market, competition among private equity houses is fierce.

What impact is this having on valuations?

The supply and demand aspect is king here: a significant amount of capital is chasing relatively few deals, so good quality assets clearly come at a premium. GPs that need to deploy capital will go all in on these opportunities (although processes and due diligences will still be very thorough) and this can result in valuations that remain high by historical standards.