French portfolio companies survey highlights challenges ahead

Hackneyed as it is, "cautious optimism" is a term that seems perennially applicable to the French private equity industry. Local practitioners are usually keen to toe a fine line between promoting the country's undeniable strengths and acknowledging, but not overplaying, their frustration when it comes to its lingering structural and macroeconomic woes.

Thanks to a fresh piece of research conducted by Ifop for trade body Afic and the Boston Consulting Group (BCG) at the end of 2014, it would seem the managers of private equity-backed firms are equally ambivalent as to what the future holds. While optimism surveys targeting business executives are not uncommon, the Ifop/Afic/BCG barometer focuses exclusively on private equity portfolio companies by reaching out to 138 executives backed by Afic members, across a variety of sectors and company sizes.

The survey highlights that 2014 stood out as a tough year for many. As most businesses are currently crunching the numbers before finalising their end-of-year accounts, 43% of those surveyed state they are more pessimistic regarding their capacity to hit revenue targets for 2014 than they were at the end of Q3 last year. Only a quarter (25%) are more optimistic, with nearly a third (32%) believing that Q4 should not impact overall performance for the year.

Looking forward to the months ahead, the expectations are overall positive. More than a third (36%) of the managers surveyed expect an increase in domestic turnover for the next 12 months, with 15% expecting an uptick of 15% or more year-on-year. A fifth of the respondents, however, expect to see their domestic revenues decline in 2015, with 11% anticipating a modest decrease of between -1% and -5%. With the largest group of respondents (44%) forecasting local turnover to stay level in the year ahead, it is clear businesses still have to deal with a French economy in recovery mode, even if they benefit from the support and guidance of private equity backers. According to recently released figures, French GDP grew by a lacklustre 0.4% in 2014, against 1.6% for Germany and 2.6% in the UK.

One of the drivers behind this level of uncertainty lies with businesses' current order books. A third of respondents state their order books are more promising than last year's, but an even greater number (38%) report a decrease. For 28% of respondents, the situation has not changed compared with the previous year. These mixed expectations are likely to make the job of private equity sponsors more complex, as a lack of visibility on upcoming business can be detrimental in terms of portfolio management but also when it comes to attracting suitors in exit processes.

Greener grass
Portfolio company managers are more bullish when it comes to export prospects, though. A majority of respondents (52%) expect their revenues generated outside of France to progress in 2015, while 9% anticipate a decrease and 39% expect these revenues to be stable. These figures compare favourably to the domestic growth forecasts mentioned above – not relying on domestic demand to generate revenues has been increasingly crucial for French businesses looking to attract funding in the post-crisis years and 2015 should be no exception.

Given these mixed expectations, it is not surprising to note that only a minority of respondents (26%) expect their staff numbers to grow in the coming months, while 27% plan on culling headcount and 47% expect no change in this area.

Finally, the study gives useful insight on the issues that keep executives awake at night: labour costs are the number one concern for nearly two-thirds of respondents (61%), and legal and regulatory constraints are also high on the list with 40%. The main solution put forward by the respondents to boost investments and job creation in the country – simplifying labour laws – could be partly addressed sooner rather than later, as the French parliament is currently debating a sizeable package of pro-business measures introduced by the Socialist government. The other priority – putting an end to France's highly divisive 35-hour working week – is highly likely to remain wishful thinking until the next elections in 2017, if not beyond.

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