Cross-border investments : Getting into the French market

Greg Gille
15 June 2010

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The acquisition of French company FDG by Deutsche Beteiligungs (DBAG) is the first example in recent years of a German private equity house shopping across the Rhine. Whilst the country has historically been one of the largest buyout markets on the continent, very few deals usually involve foreign investors. Greg Gille investigates

Why is France out of reach for foreign private equity? Three factors could be taken into account to explain this state of affairs, namely legal barriers to entry, the nature of the French market and cultural differences.

The legal argument doesn't carry much weight - France has built no more and no less legal defenses to protect its companies from foreign investment than its neighbours. The 2004 Foreign Investment Law states that the government could only veto buyouts in very specific sectors of industry; those that exercise public authority, activities that might endanger public order or companies with interests in national defense and arms dealing. Even if a particularly protectionist French government would try and oppose buyouts of other "national champions" for political posturing, the EU would be quick to remind it of the free circulation of capital guaranteed by European treaties.

Both the structure of the French buyout market and somewhat less tangible cultural differences offer a more constructive insight into the matter. In the past, foreign investors have usually been limited to larger transactions. Not only did the financial crisis severely strangle the top-end market, but small and mid-cap deals are traditionally more prevalent in France. Additionally, family and private vendors have historically been the largest source of deals in the country. This market structure allows for cultural understanding to play a greater role as Eric Bismuth, president of Montefiore Investment, explains: "Cultural understandings in the small- to mid-cap segment of the buyout market plays a significant role to both understanding the inner workings and running of companies - factors which are often lost on foreign investors. Subsequently, a number of funds which have invested in France in the past have often not recorded a good performance lately and have left the market."

DBAG's approach seems to validate that theory. While the firm had been interested in French family-owned companies for a while, it was advised on this latest deal by Quartus, a French private equity firm with experience of the national mid-market. Patrick Jemelen, the Quartus partner in charge of the buyout, hails from Alsace near the French-German border. He speaks fluent French and German and is well acquainted with both cultures, an ideal candidate to bridge the gap. Moonlighting as advisors to foreign funds could indeed prove to be a lucrative diversification for French private equity houses.

While France is unlikely to see a flood of foreign investors in the near future, those firms that can access business contacts in the country, or obtain a local presence in the market, will find French companies are more open to foreign investment than a casual glance might suggest.