France among "best in the world for PE returns" – Afic's Chabanel

Greg Gille: The post-crisis era has been rather tumultuous for the French private equity industry. What is your take on where things stand now?

Michel Chabanel: The last 24 months have indeed been complex. The crisis unsurprisingly led to a more hostile attitude towards finance, and in that context private equity was often misunderstood and associated with other areas of the financial sector such as hedge funds. My predecessors at the head of Afic have done a considerable amount of work to address this, and their main area of focus will remain a key element of my mandate: tirelessly explain our industry so that decision makers understand how it works and acknowledge its positive contribution to economic growth.

Some progress was undeniably made in the past two years, although a lot of this work was reactive given the sheer volume of new legislation and regulation affecting both the private equity industry and the wider business community. Afic's main effort was to highlight the link between private equity, its strong impact on the development of businesses, and the positive outcome in terms of job creation.

Our message is simple: we are not acquiring companies to drive them into the ground but to help them grow, as this is how we can create value for our investors and, through them, the wider population.

GG: Is this message getting across?

MC: Things have certainly moved in the right direction. Although it varies on an individual basis, the politicians and decision makers we meet are by and large aware of the need to have patient capital finance businesses, and therefore of the role played by private equity.

More generally, this need to continually explain our industry and its importance remains one of the main areas where we'll be focusing our efforts. This has to be done at the national level of course, but also when it comes to wider regulation. Private equity still has to deal with the ramifications of initiatives such as AIFMD, where misconceptions led to our industry being bundled with other asset classes. This requires constant attention, as we have to monitor every new piece of legislation and every amendment, since they could indirectly affect private equity without specifically targeting it in the first place.

GG: Afic has been relentlessly highlighting the growing gap between the capital raised by private equity players and the funding needs of the French economy – does that remain a priority?

MC: We must continue our work to increase commitments by French institutional investors; unquoted opportunities currently make up only 1% of their allocation strategy, compared with 3% when looking at European investors and even more in the US. The larger, more established French investors are already in line with their international counterparts in that regard. The challenge for us is to convince the others to follow suit.

One of our other pressing goals is to keep promoting the progress made in France to international investors. We did a roadshow in London recently, and LPs there were still worried about a misalignment of interests between French GPs and their investors, but this was based on the rumoured 75% capital gains tax that was being debated a few months ago, not on the more reasonable arrangements adopted afterwards. Our job is to address these misconceptions and explain that the current framework in France is much more business-friendly.

GG: France still seems to be stuck in an uncomfortable middle ground when it comes to international LP sentiment – its macroeconomic prospects are regarded as less attractive than that of its northern neighbours, while southern European countries are viewed as increasingly attractive for opportunistic investors. How can French private equity address this?

MC: Interest from international investors does seem to have returned following a rough patch during the worst of the crisis. There is a growing realisation that France is a mature economy with an environment that is not as unstable as previously thought, and that returns are in fact very attractive. This is what we have been promoting through the publication of our latest performance study: France remains one of the best countries in the world when it comes to private equity returns. The legal and fiscal framework might be more challenging sometimes, but France is still home to a solid base of attractive SMEs in need of support, which ultimately presents local GPs with great opportunities.

The main message here is that it is difficult to totally disregard the wider macro economy, but focusing purely on this is not relevant in the context of private equity. Spain and Italy are indeed enjoying renewed interest from investors – much like they did before the crisis – but look at these countries' long-term private equity performance: they are the only ones in Europe with flat or even negative returns.

France's performance also compares very favourably with other attractive European countries. German funds for instance have a 8.8% net IRR over the last 10 years, while that figure reaches an outstanding 10.7% for French GPs.

GG: Now that progress has been made on some of the key challenges affecting French private equity, what is the current mood among local managers when it comes to future opportunities?

MC: The difficulties experienced in recent months – from the continued impact of the crisis on portfolio performance to the various measures potentially threatening the industry – left many professionals feeling rather pessimistic. Sentiment has definitely improved on these fronts, but dealflow remains a source of concern. There was a welcome uptick at the end of 2013 and in the first weeks of this year. From what we are gathering from our members, the pipeline is looking slightly less promising right now.

We need to keep a sense of perspective though: of course we would all be happier with more deals being done, but it is in the nature of the industry to have calmer periods followed by increases in activity. This is not the first time this has happened either; a dip in the market at the beginning of the 2000s didn't stop the local industry from developing and maturing throughout the decade.

Michel Chabanel was elected as the new chairman of Afic on 18 June. Currently president of Céréa Partenaire – a mezzanine and equity investor focused on the agribusiness sector – he started his career at Crédit Agricole Indosuez and later held roles at Royal Bank of Scotland and Pragma Capital. He has been administrator and treasurer of Afic since 2012 and 2013 respectively.

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