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Overview of the private equity market in Europe: France is doing well!



The French private equity market continues to be going through a prosperous period. Many indicators keep on flashing green and in particular the abundance of liquidity and the availability of debt on (still) very reasonable conditions although the macroeconomics perspectives seem less favorable now and the image of France abroad, which were boosted by the Macron’s election, may have suffered from the gilets jaunes (yellow vests) demonstrations and riots.

Record Breaking Fundraising

Nonetheless, over the past years, fundraising reached record levels, thanks in particular to the good performances of this asset class over the last few years and the lack of attractiveness of bank investments, which were constrained by low interest rates. The investment funds thus have abundant liquidity and, at the same time, debt financing remains affordable and accessible.

New Players and stronger Competition

In this context, the competition for the acquisition of quality assets is raging and the acquisition multiples are experiencing growth that is reaching new heights. According to the Argos Mid-Market Index, the average multiple over the first semester of 2018 was 9.9 times EBITDA. This competition is exacerbated by the increasing number of new players coming directly to compete with conventional private equity funds. Attracted by good returns, long-term investors (foreign pension funds, institutional, LPs, etc., but also family offices) are increasingly attracted by direct investments in the non-listed entities. These investors manage to attract not only sellers by high prices and timely execution capacity, but also the management teams to which they bring prospects of stability that may seem to some of them more reassuring and less anxiety-provoking than the exit objectives in the short / medium term - even if for these long-term investors, the structuring of the managers’ participation in the capital of the target may have to be rethought to tackle the issue of a more distant horizon of liquidity.

Dynamic Market Trends

The dynamism of activity is probably also linked to the growing interest that foreign investors, especially those from China, seem to have in the French market. Foreign funds seem seduced by our new president who, in addition to giving France a younger, dynamic and "business friendly" image, has initiated reforms in tax and social matters to comfort and restore confidence of foreign investors sometimes puzzled by some aspects of the French system. Time will tell whether this trend continues or not with the possible impact of Brexit on UK investments and the possible backlashes resulting from the yellow vests protest.

Other market trends seen in 2018: the multiplication of LBO refinancing operations in anticipation of a possible rise in interest rates, and the development of build-up operations outside France, particularly in Europe, led from their French investments by French funds.

In this context, what are the recent or future developments in the practice? In legal terms, there is a growing development of the use of W&I insurances. The W&I insurances imported from the Anglo-Saxon practice tend to develop strongly in this market favorable to the sellers where to offer a "clean exit" without warranties from the sellers is a strong argument in the contest. Thus, we observe the development of warranty agreements with a 1 euro cap relieving sellers of most of their obligations in this respect.

Evolution of the tax structuring of LBO operations

The tax environment is contrasted: the entry into force of the flat tax of 30% on capital gains should allow the implementation of more attractive management packages, subject however to a favorable clarification of case law on the tax and social qualification of the related gains. As for the evolution of the tax structuring of LBO operations, it should be carried out as of 2019, and for all outstanding loans, in compliance with the new rules for the deduction of financial charges resulting from the Anti-Tax Avoidance Directive (ATAD) transposition into French Law, which is mainly based on an overall deduction limit of 30% of the EBITDA.

Tour d’horizon du marché du private equity en Europe : la France fait figure de bon élève! – Article paru dans La Lettre des Fusions-Acquisitions et du Private Equity, supplément n°1455 du magazine Option Finance du 26 mars 2018 

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Laurent Hepp
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Arnaud Hugot