French SBO boom: no end in sight?

With a whopping 51% of all buyouts being sourced from other private equity houses, according to unquote" data, 2011 clearly was the year of the SBO in France. This figure trumps the previous year's record high of 37% - gone are the days when SBOs accounted for barely a quarter of deals, as was the case between 2001 and 2006.

The "win-win" nature of such deals is well documented: GPs eager to deploy capital are on the lookout for easily-sourced, resilient businesses - which are more likely to already be in the hands of their like-minded competitors. This is not lost on fellow PE firms aiming to quickly rationalise their portfolios ahead of the next wave of fundraising, especially as the IPO market remained depressed throughout 2011 and trade buyers focused solely on "best-fit" assets.

"SBOs mechanically benefited from the strong recovery between mid-2010 and mid-2011, but maybe even more so than other types of acquisitions: potential buyers tend to already be familiar with such assets, having previously scouted them at the time of the original buyout," notes HIG Europe managing director Olivier Boyadjian. "Besides, many funds returned aggressively to the market following a virtually deal-less spell between 2008 and 2010, hoping to reduce their dry powder before investment periods end."

Timing issues aside, this SBO frenzy highlights the challenges faced by GPs chasing elusive primary transactions in the current environment - raising questions as to whether it is likely to subside anytime soon.

Dealflow from private vendors remains lacklustre and hasn't benefited from the general uptick in activity - such deals accounted for slightly more than a third of all buyouts, down from half in 2010. Industry players are prone to lament the continued gap on valuations between sellers and buyers, as well as a scarcity of quality assets on the market.

Meanwhile corporate spin-offs were also few and far between in 2011, despite observers believing that distressed companies would sell non-core assets to weather the downturn.

Light at the end of the tunnel
That said, long-term market trends hint at a brighter future for primary transactions in France. Firstly, a number of mid-cap players closed new funds and fully invested their previous vehicles last year - as the pressure to reduce dry powder has eased off and most of the best PE-backed assets have already changed hands in the past few months, these GPs will hopefully enjoy more latitude to scout untapped potential on the primary market.

Private equity firms will also look to capitalise on favourable demographic trends driving sales of family-owned businesses. "The baby-boom generation of entrepreneurs is now approaching retirement, which should present good opportunities for PE houses in the next few years," says one Paris-based GP.

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• Topics
• France
• Buyouts
• Secondary buyout
• HIG Capital