Liquidity raises from the East to settle in the West

Following the EUR1.6bn Cegelec buyout last month, which saw the company purchased by Qatar-based Qatari Diar, it's now the turn of neighbouring Bahrain to stage their own large LBO of a French company. Sagard has recently signed a definitive agreement to cede portfolio company Compagnie Europeenne de Prestations Logistiques (CEPL) to the Bahrain-based Arcapita Bank for an enterprise value of between EUR550-660m.

The investment seems to reconfirm the views that French GPs will start to face tougher competition from abroad, especially funds and investors from the Middle East. This was the view expressed in the last issue by Charles Diehl of mid-market buyout specialist Activa Capital and Antoine Drean of placement agency Triago. Fuelling this speculation, Triago reported from their Dubai office the increase has resulted from far more efficient family offices in the region, with state-owned Qatari Diar alone intending to spend around EUR2bn in Europe in the next few years. It is important to highlight a clear definition between sovereign wealth fund-backed investments and private ones, though they both have high levels of liquidity meaning they are willing and able to invest. Could we be looking at another case of the 1970's - 1980's petro-dollar influx into Europe?

Well yes and no. In a way the high price of oil and subsequent riches bare the same hallmarks as the previous mass foray into western markets. With the Middle Eastern markets relatively small compared to the mature European markets it can be understood why there is a desire to invest in the latter. The concept of debt in the Middle Eastern regions is still in its infancy. In European markets, even though debt issues currently plague the global private equity markets, it is still obtainable through local pockets of liquidity and even staple finance, which remains on the scene. Additionally, the European concept of private equity is very compatible with Sharia law, under which regional investment groups such as Arcapita operate.

So the main difference with this wave of investments coming from the Arabic states is that they are being conducted far more carefully and strategically by a number of highly skilled investors, both of European and Middle Eastern origin, operating for a greater number of mature investors.

It is still hard for French GPs to get debt to fund LBO purchases at the higher end of the market. Vendors are therefore are generally welcoming this influx of new capital from the Middle East, since it helps meeting their valuation expectations. More importantly, on the whole people are far more open to the idea of Middle Eastern money propping up French companies than previously. This feeling is not always shared by all, as we recently observed this summer with Monaco's Societe des Bains de Mer et du Cercle des Etrangers refusing to accept more than a 10% investment from Qatari Diar.

Numericable and Completel, Converteam, Cegelec, BUT, GTT and now CEPL, of the top buyouts in France this year, only one has involved an acquisition by a French GP. Thankfully it was the largest deal, the EUR1.9bn acquisition of Converteam involving LBO France. One would think such a feat would have French private equity rejoice; instead, the main thing the deal has achieved, apart from a large windfall for the management, is to irk a number of politicians and employees drawing private equity out of the shadows for an annual critical hiding followed by a bout of infighting over the 'values of private equity'. In the meantime 'valuations' are apparently something the Middle East can afford.

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