France: Strong policy support needed for prosperous 2016

In August, as part of an in-depth survey of the French private equity market, unquote" found the country at the top of the European roster: at 45 deals from 20 May to 30 June, French houses leaped ahead of the UK's 38 transactions. At the time, local players questioned how long this revival would last; however, it appears to have survived the test of time: between January and November 2015, France housed 292 deals worth an aggregate €22.7bn, a notable 44% uptick on the €15.7bn witnessed in the same period last year, according to unquote" data.

One cause for the dramatic rise in total valuations was Apollo's €2.9bn investment in Saint Gobain's glass bottle-producing division Verallia in June. The takeover was instrumental in making industrials France's most sought-out investment area so far in 2015: at a combined €9.2bn, the sector's businesses have reaped 40% of all private equity funding in France, up from last year's 20%. The picture was bleaker for healthcare assets, which went from representing 38% of all capital in January-November 2014 to little more than 16% this year.

Pushing primaries
At a recent gathering in Paris, industry voices predicted a deeper focus on sector specialisms would become more prominent in what looks set to be a competitive 2016. The strategy has already proved valuable to GPs such as Weinberg Capital Partners. "As asset prices climb up in France, quality companies become increasingly fought-for," says Weinberg partner Jérôme Louvet. "It is essential for GPs to differentiate themselves, which we do by looking at the distribution segment, among others."

PAI Partners CEO Michel Paris believes the coming year will favour managers focusing on primary deals; a notable differentiator in a country where, according to unquote" data, secondary deals have accounted for 72% of all buyout-related deal value so far in 2015. However, according to Activa Capital partner Charles Diehl, sourcing primary transactions could remain a challenge as stifled economic growth and a complex fiscal environment discourage French family owners from selling.

Outside of refining origination strategies, for French GPs looking ahead to 2016 and beyond, political headwinds are emerging. "Next year, the economy might grow slightly thanks to external factors such as oil prices," says Diehl. "With elections in 2017, Hollande is probably hoping that will be enough so that unpopular structural reforms aren't needed. Still, investors are holding out for signs of change; political pressure will probably be lower after the 13th November events but after a while, things could heat up a bit again." Indeed, trade body Afic, speaking with unquote", has already called for bolder policymaker action.

Gaps in the French VC chain
For French VCs, 2015 has been a favourable year, according to Isai CEO Jean-David Chamboredon, who reports a 50% year-on-year increase on funds raised by the segment. The boom is evident in the six fund announcements recorded by unquote" in November alone. Chamboredon welcomes the competition but warns of an imbalanced financing chain: "Most of these funds focus on the seed and series-A space, yet there is a shortage of series-B financiers in France. If everyone pumps early-stage money into these startups yet fail to support them later, expansion could become a problem."

According to Isai's founder, another Achilles' heel for French venture houses is an anaemic business angel community, numbering just hundreds while other ecosystems worldwide boast thousands of startup-backing entrepreneurs. "Once they sell their first startup, many of our entrepreneurs are being pushed away from the country by an unforgiving wealth tax that effectively deters them from re-investing in those sectors they are familiar with," says Chamboredon.

Towards the end of 2015, increasingly volatile public markets have been a recurring theme worldwide and France has not been an exception. A recent string of high-profile frustrated listings – including Advent's Oberthur and VC-backed Deezer – has sparked debate around whether the IPO window might soon be closing. For Chamboredon the situation is clear: "Exceptions like biotech and medtech aside, there is just no IPO market within French venture capital. The country isn't ready to finance a typical Nasdaq business curve, where an innovating internet scale-up accepts significant losses in order to drive strong growth. French IPO analysts are obsessed with positive EBITDA graphs – not a single one seems to understand the internet segment."

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