Q & A – Funds-of-funds speak out

How does French private equity compare with other European countries at the moment?

AGF: In 2006, The French private equity market was the second largest in Europe in terms of the numbers of companies financed by LBOs. However these investments still only represented 0.6% of GDP – behind Sweden, the UK and the Netherlands – so there is ample room for growth. There remains a strong reservoir of deals thanks to widespread buyout awareness and predictable succession issues. Recent fundraising volumes will likely fuel the upper mid-market competition for the next two to three years. Secondary buyout activity is expected to remain high.

Pricing in France has become more competitive as the market has matured. Management packages often become very aggressive as a result of this and as a result of the growing number of experienced serial entrepreneurs. The positive aspect of the situation is that companies are managed more professionally and that there are an increasing number of target companies for private equity investors.

AXA: France is recognised within Europe for its high-quality, mid-cap teams. Furthermore, the professional standards in terms of transparency and professionalism are at least as high as in the US or the UK.

Danske: Our general view of the French private equity market is that it is a professional market where the industry is generally accepted and where deals get done on a continuous basis in all relevant segments.

Has this summer’s credit crunch had any impact on your private equity investment decisions?

AXA: Funds that have invested a lot recently will take longer to repay their debt, which will naturally impact on IRRs. However, companies are still healthy and there are no long-term concerns. Mid-cap GPs are likely to be favoured by LPs until the larger players re-organise themselves. Mezzanine and secondary funds will benefit significantly from this new context.

Danske: For some years, we have pursued a hands-on strategy in our fund selection, attaching great importance to the operational abilities of managers. One of our reasons for doing so has been the lessened dependence on a generous lending environment. So we will be sticking to that strategy both in the immediate future – when there is no real alternative – and as a general principle through other phases of the current business cycle.

How has the balance of power between GPs and LPs changed in recent months?

AGF: The balance of power has been largely influenced by the buoyant market and the ability of top fund managers to raise new funds quickly with existing investors. In spite of tight fundraising conditions, we feel that there is still an acceptable balance of power with our managers. Given the current unease in the market, new investors may be less willing to commit quickly to funds with limited due diligence time. However, we have not yet had any shift of relations with GPs that are relevant to the current crisis in liquidity following the sub-prime debacle.

Danske: GPs and LPs are in this together and are all doing very well out of it. As long as this general trend persists, there’s no need for the kind of general confrontation that a significant re-working of generally accepted market practices would mean. The lesson from the bursting of the tech bubble was that unsuccessful latecomers to the market were weeded out, but that the general venture capital fund model remained in place. Perhaps significant regulatory action could be an agent for change.

How attractive is the venture segment at the moment?

AGF: We feel that the segment is very attractive at the moment. The quality of the dealflow has significantly improved in the last few years and there are an increasing number of experienced managers. Currently, sectors with attractive opportunities include clean-tech, life sciences and e-commerce. Given the current situation in the credit markets, investors may increase their interest in the segment.

AXA: A lot of work will be required for the French venture ecosystem to flourish. In the US, there are several large venture firms working hand-in-hand with universities and research centres (themselves cooperating with military research facilities), all of which are benefiting from generous support from the federal budget. Despite all of these positive elements, the US venture segment has a relatively unattractive overall performance. Venture’s main purpose in a private equity portfolio is diversification.

Danske: While I mentioned above that the venture capital fund model remained in place, the venture business model, so successful in the 1990s, hasn’t really recovered from the bubble. Loss ratios remain at their pre-bubble levels, particularly in IT, while home runs are for smaller multiples. A number of elite venture capital funds continue to build great companies, but put only small amounts of cash to work. This being said, life sciences remains a sector with a high consistency of returns for the patient investor. IT should also do well in the negative stages of a business cycle, as company executives become more motivated to invest in cost-saving products. The increased focus on environmental issues could also be an opportunity for clean-tech funds.

How has in-house investor relations affected the way you interact with GPs?

AGF: Having a point of entry with an investor relations specialist can facilitate interaction with GPs, particularly when they are raising a new fund. In today’s environment, most established teams have at least one professional or a partner designated to this role. The role of investor relations will continue to develop as the market matures and as investors are increasingly demanding when it comes to the level and standards of information expected from their GPs. Due to our presence on advisory committees, regular monitoring of portfolio investments and an active coinvestment programme, AGF Private Equity professionals build relations with various members of the teams we invest in over a long period of time. As a result, the role of inhouse investor relations has perhaps enhanced relations in some cases, but has not affected the way we interact generally with GPs.

Danske: When we do encounter them, our experiences are favourable: the mechanics of fundraising become less of a distraction for key investment professionals. But we still want to meet all significant team members face-to-face before we invest.

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• Topics
• Fund-of-funds
• France