Is French Private Equity in limbo ?

An article from January 24th in Les Echos (read here) has shaken the Private Equity microcosm in Paris. The sector is in crisis, with all named funds reportedly in trouble or even on the verge of collapse.

And there are people calling us to ask if it is still worth investing in Private Equity in France.

The first thing we need to do is draw the readers' attention to the slightly triumphant tone of the journalist from Les Echos. Then, she cites facts that span a period of about 2 years. It is true that this is accelerating. Like everything in France... But rather than analyzing this movement in relation to the absolute disintegration of the French economy, caused by political sorcerer's apprentices who have never worked or created value like the people mocked or criticized in the article, all the weaknesses of Private Equity are pointed out. Ignoring the real facts, which are regularly highlighted by France Invest, and which show that PE funds are not harmful, but support the French economy in all the challenges it faces due to the culpable negligence of successive governments.

Let's take a closer look at what the movement described in the attached article will cause for investors in Private Equity funds exposed to France. And let's coldly analyze if it is such bad news. Spoiler: we don't think so. France, given the difficulties it has been plunged into by a failing political class, is only playing the role of precursor... This movement will happen everywhere. And it will be beneficial for the profession, and especially for investors who have the nerves to stay exposed.

Let's look at the facts reported in the article:

- An investment bank focusing on advising PE funds, DC Advisory, is closing its Paris office. The teams, even in the last three years which can undoubtedly be described as very difficult (like 2007 to 2009), have completed transactions and generated significant fees. Yet, their parent company in Japan decides to close the office... Could it be related to the fact that these Japanese, like most foreign investors, are losing faith in France? That they no longer understand the mess that the government and parliament have become? That they think their clients, investment funds or sellers of companies to these funds, are so criticized in France every day by incompetent politicians who are sure of their opinion which is not based on facts but on sterile ideology? The market consensus predicted a restart of transactions in September 2024. Then came the dissolution, then came the mess, then came the new competition to invent the most stupid tax. Then came the wish to abolish the pension reform, already a mini-reform that solves nothing, sacrificed on the altar of maintaining the current Prime Minister until March 31, 2025... The Asians, being far from the Parisian microcosm, look at the facts and the big picture. They don't understand what happens in France (like the French taxpayer, by the way). And they have fewer scruples about drawing a line. In short, 40 competent and valiant bankers find themselves on the market. A complicated market. Because it is not in 2025 that business will resume in France, given the absurd political situation raising so many fears that no economic actor dares to make medium-term decisions.

- Some funds are reducing their presence or closing their Paris office. Same cause, same consequences. No transactions, no need to maintain a physical presence. Added to this is the additional uncertainty of the arbitrary (and frankly pathetic) media coverage concerning the "strategic sector" as experienced with Doliprane... Which fund aiming to buy and develop a company to make a profit in 3 to 5 years will still look at French companies if the mediocre rulers aim to block the sale of a simple manufacturer that presses pills from an open-source princeps sourced in India?

- Moreover, and this will never be mentioned in the French press, the teams of these funds do not find themselves out of work! They are very happy to migrate to the Netherlands, England, or Luxembourg. Fewer constraints, fewer taxes, and above all less arbitrariness and bad press!

In summary, France continues to make noise, but nobody listens to it anymore. A cold look shows all the important structural problems that no political leader dares to tackle. Finance, populated by vaguely intelligent and especially mobile people, has understood this and is drawing the consequences...

However, it is true that the Private Equity sector is going through a crisis. Like in 2000/2001, 2007/2008, or (for Europe) in 2011/12. Today, the reasons, reduced in the article in a somewhat simplistic but realistic way to the structural rise in interest rates, are causing paradigm shifts for the funds. They are raising less. They can no longer live off the management fees generated by increasingly large funds. Yes, there will be damage. Performing funds will have to reduce the volumes they raise. Less performing funds will no longer raise and will disappear...

Is this bad news for investors? No! Nor necessarily for management teams. We will return to the fundamentals that made Private Equity a distinct asset class and which has been (and will remain in our opinion) better performing than public assets (see our previous posts). How?

- The fund teams will no longer make a living solely from fees. They will have to remember that the main source of becoming rich is carried interest (the sharing of the capital gain). It is true that for the past 10 years, funds have raised such amounts that performance no longer mattered, fees made partners rich. If new raises are made at reduced volumes, teams will realize that carried interest is worth money. And good funds generate capital gains in all weathers.

- The French market has been among the most active in Europe over the past 10 years. Funds are key players in the landscape. They have portfolios to sell. And they constitute an essential source of liquidity (since the same politicians still do not want to hear about pension funds and continue to combat long-term capital with regulations like Basel or Solvency, which other blocs refuse). Funds will remain key players. But like in every storm, we close the hatches and set sail at the first ray of sunshine. Will this ray come in 2025 or 2026? We couldn't tell you. But these professionals will know how to anticipate it. And they will take the opportunity to rotate their portfolios, which are frozen today. And with the funds at their disposal, they will know how to seize opportunities. They will do it from abroad, not necessarily from Paris, but they will not turn away from France. Let's not forget that France produces the best entrepreneurs in the world! And for good reason! If they are in France and succeed, despite a bureaucratic and hostile environment as experienced over the past 40 years, it is because they are better than all the others. Only our politicians do not understand this.

In summary, the recent retreat of established funds in Paris does not mean that these funds are disinterested in one of the main European markets. The current instability creates investment and value creation opportunities like in all countries or periods under stress. A savvy LP will have every interest in choosing this country as a priority deployment target, provided they invest in professional and proven teams.

Despite all the efforts of a mediocre, incompetent, and sterile political class, the investment market in France is not dead! It rather holds significant potential to be seized by LPs who have flair and nerves. And who will be rewarded for it.

Make France desirable again! And shut out the noise. Fundamentals are there to be seized!