Q&A - Small is beautiful

Patrick Lissague is director general and investment director of UFG Private Equity, an asset management company that specialises in venture capital.

How will private equity adapt to the changed market conditions in 2008?

With the credit crunch changing the investment backdrop on a global scale, 2008 should, in theory, be a testing time for private equity, not for only the French market, but on a global scale.

After more than 20 years in the private equity market, I have experienced a number of cycles of peaks and troughs, but we are ever more prepared to deal with any crisis. The coming year will be a period of 'digestion' for the French private equity market and creditors alike. However, with a back to basics approach, private equity will adapt and be able to ride out this cycle relatively unscathed. Whereas past excesses may become troublesome for some general partners, those who exercised restraint with their investments are still in a healthy position and have an optimistic outlook for the coming year.

Compared with recent years, however, 2008 is expected to be sluggish and will yield lower rates of returns. We also expect to see a diminution in large buyout deals.

Will we see an upsurge in LP interest in venture?

The venture capital market will not be too negatively affected and may even grow. Limited partners are likely to be keener on investing in smaller deals such as the mid-market sector and venture. The minor trickle down effect due to the downsizing of larger competitors' strategies mean these sectors may become more competitive.

The anticipation of a decline in returns for private equity firms has signaled a need to go back to the fundamentals of private equity. We believe pursuing this strategy will provide long-term security and increased value in our new and current investments. Seeking out innovative mid- to late-stage ventures, attaching great importance to the quality of the management and complementing them with steady investment will, over time, result in mutually beneficial growth and returns. We pursue these same strategies with our fund-of-funds sector as we do in venture, by carefully diversifying our investment placements.

What are the reasons for optimism going into 2008?

Restraint, adaptation and long-term ambitions for investments will see the French private equity market through the current business cycle which could, optimistically, change for the better as early as the end of the year. Large buyouts are likely to be the most affected by the current change in investment climate, but with only about 10-20 big LBOs out of more than 350 LBOs in France they represent a minority of the private equity market in France. While previously LPs were very keen to invest this will be a testing year as investors will use a degree of caution. Yet broadly speaking, there has already been keen interest in the energy sector this year, which shows a degree of optimism among investors and PE firms alike. We relish the challenges of the year ahead and look forward to exciting new investments.

Charles Diehl is a partner at Activa Capital, which specialises in French mid-market buyouts and growth capital investments

The second half of 2007 saw a marked change in the buyout landscape. What will this year bring?

We expect an initial downturn in 2008, but the private equity market in France will not be too badly affected. There will, as predicted by many, be far less credit available from banks to cover large buyouts. There will be fewer large and secondary buyouts this year, but there will be an increase in industrial deals as large groups continue to focus their activities. We approach this year with a degree of optimism about our own investments and future ones.

In the sub-EUR200m mid-market sector in which we operate, GPs tend to work very closely on a very personal basis with management teams and the companies they invest in with a long-term view of their interests. This is why we believe our sector will be far less affected than others where there is more finance, less industry.

Larger GPs may decide to move into our sector, but we believe that our long-term experience in the sector will give us an advantage over any new competition. The ability of private equity to adapt undoubtedly accentuates that fact that the credit crunch will not spell disaster for the private equity market, especially in France.

How will France fare compared with other markets?

The French market has cause to consider a brighter outlook than other countries. Although the recent debt-led crisis in the US has and will continue to have a notable effect on the French market, and indeed the world, the French housing and consumer market is one of the least indebted in the world. To add to this, the French economy is becoming far less rigid and planned liberalisation as well as the prospect of privatisations and spin offs occurring could stimulate a number of new investments. There will be more opportunities to spin-off business to more efficient specialised companies.

We have dealt with such spin offs, for example with our former portfolio pharma company Delpharm which benefited from large pharma spinning off factories to more specialised firms. The relaxation of labour laws could also result in increased interest in outsourcing companies during the next year. There is also the possibility of renewed interest from Asia and the US, particularly in luxury goods and the food and beverage sector.

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