Introduction

The Association for Corporate Growth (ACG), the premier authority on corporate growth, corporate development and mergers and acquisitions, is hosting the European Capital Tour this week in Paris, Amsterdam and Frankfurt (beginning  in Paris,  October 8th, moving to Amsterdam October 9th and ending in Frankfurt October 10th). The tour, ACG’s first in Europe, will start conversations between US private equity and dealmakers in the European middle market. It builds on ACG’s established Intergrowth event held annually in the US, as Majunke Consulting recently reported.

This European Tour by American private equity investors comes at an opportune time for US investors. The cheaper euro is an advantage, but more important is the regulatory and practical need of European banks to sell assets in order to boost reserves. It’s been reported that European institutions will need to deleverage $3 trillion in assets over the next 18 months, as The Deal reported this year.  Indeed, the French Private Equity Association (AFIC) has reported,  private equity activity in France alone accounts for 20% of the European market, is the largest in Continental Europe and the third-largest worldwide.  Private Equity supports a significant portion of employment in France and represents one of the main growth drivers for the French economy.

Alternative assets industry’s data provider Prequin reports that “there are currently 145 private equity firms operating from France. Collectively, these firms have raised over EUR 54.1 billion in private equity capital over the last 10 years, and have approximately EUR 18.3 billion available for investment.

As the rules, regulations and financial backing are the same for all businesses, regardless if they are domestic or foreign, US private equity firms are not only welcome in France, their ability to do deals here is on an equal footing as that of any domestic funds.  There are however, unique operational and legal considerations to keep in mind when seeking investments in France.  This article seeks to provide inbound private equity groups with an insight into the unique nature of the French private equity landscape, and how you might best navigate it.

American Private Equity Groups Doing Business in France

US private equity funds began to establish operations and do business in France in the late 1990′s.  As David Carey reported for The Deal Pipeline, “Washington-based Carlyle and Colony, a real estate-oriented group based in Los Angeles, were the first U.S. PE players to establish operations in Paris – and a majority of deals they have done in the EU since then have been done in France.  Not only a local presence, but working with senior French professionals with a knowledge of the French political, economic and cultural business environment has been essential to the success of Carlyle and other groups”.

EU regulation of Private Equity

It is important for every American private equity investor seeking EU opportunities to understand and take guidance on the unique nature of the EU internal market and the unique regulatory environment governing EU private equity transactions.  Jennifer Payne of the University of Oxford Faculty of Law provided an up-to-date overview of EU regulations of private equity in a July 1, 2011 paper entitled Private Equity and its Regulation in Europe.  The European Commission governs the activity of foreign and domestic private equity activities within the EU, with an aim to “financial stability, transparency and investor protection”.

Labor Market Regulations in France

One of the most important considerations when making private equity investments in France, is understanding French labor market regulations, and planning accordingly.  France maintains strict rules regarding the protection of workers rights (indeed, private equity investment in France actually leads to job creation), and private equity groups doing business in France must plan well ahead to include cost and legal considerations associated with these regulations – into any deal scenario.

The global financial crisis, as in other markets, has temporarily narrowed access to leverage for deals, however prospectively, this climate can reasonably be assumed to be on the mend, albeit perhaps more slowly than anyone would wish.  While the downturn and its effects have created lower short-term returns for some investors, there is a silver lining in new opportunities available on very good terms.  However, the current climate requires both extra diligence in the deal process, as well as longer than average patience to achieving an ideal return after a company enters your portfolio.  As well, more strict EU oversight over bank balance sheets may create a more difficult climate for lending into deals.  However the full effects of Basel III, as these regulations are called, is yet to be seen.

Conclusion

While buyouts are not occurring at pre-crisis levels, distressed opportunities do exist. David Carey at the Deal Pipeline reported that restructuring specialist Douglas Rosefsky, managing director at Alvarez & Marsal France, says he expects to see more such deals [but] “You have to know how to use the different negotiation processes of the French system, out of court or in court.

As Carlyle managing director Benoît Colas told David Carey: “I think we’ll see prices go down. We’ll be able to buy good businesses at low multiples, with not too much debt,” he says. “Time will tell, but we hope we’ll be able to look back and say, ‘Man, those were great deals we did in 2011 and 2012.’ ”

Indeed, US private equity funds would be wise to seek out and secure the opportunities the French market now offers, while also taking Mr Rosefsky’s advice and secure the best available legal assistance very early on in the process — to both mitigate risk and increase return.

Benoît LAFOURCADE

Co-Founder, Partner & Solicitor -
International Corporate Law & Litigation

Benoît, Delcade’s co-founder, is a Paris Bar lawyer and UK Solicitor (London).

Advisor for various embassies, working closely with the firm's team, Benoît offers his services to French and foreign companies requiring cross-cutting strategic and legal support in business law.

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