Focus on: France

It would be tempting to draw hasty conclusion from the recent presidential elections in France. Despite significant executive powers, the newly elected centrist president will have to work with a mosaic of different incumbent interests. The ultimate outcome of his political agenda is difficult to predict. However, the country might benefit from a renewed investor interest if it can unlock its economic potential through reform. Germany offers a salutary example, having exhibited strong economic growth and very solid fundamentals after the painful reforms undertaken in 2003-2005 (named ‘Agenda 2010’).

In many respects, the investment landscape in Germany differs from France. One is of importance: France has a much more developed private equity sector than Germany. If the new administration delivers on the liberal economic program of the President, the local private equity sector should benefit. In particular, providing more flexibility to the labour code should support the economy, whether in the start-up world or in the more mature part of the economy. Moving towards a Scandinavian-inspired mix of flexibility and security can only encourage entrepreneurship, and therefore an increased deal flow for venture financing. Lower corporate tax rates would help local companies to reinvest part of their profits, and might lead to increased investments and economic growth.

Paradoxically, a lower corporate tax rate reduces the attractiveness of the tax leverage embedded in leveraged buy-outs (LBOs). Renewed economic growth could lead the ECB to increase interest rates, therefore reducing the attractiveness of the financial leverage. If the ECB adopts guidance on leverage levels1 as the US did2, French LBO fund managers could accelerate the transition of their focus from the usual tax and financial levers to generate performance to more operational and strategic endeavours. They would in that respect follow the path already taken by their American colleagues.

To better anticipate changes in French private equity, it is always useful to look at the past and try to understand the evolutions over time. Pevara provides a wealth of data that can be used for that purpose. Though comparing countries and geographical regions is not a definitive approach (countries cannot be benchmarked like companies), it might be useful to put in perspective French private equity data with Western Europe’s3. This issue of FrontLine focuses on this approach to draw conclusions, and see if France is “the good pupil of Europe” in private equity.

Table 1 – Compared performance benchmarks of Western European and French private equity funds