Analysis

ROUNDTABLE

SPONSORS • • DECHERT •

More than just looking for profit

Four insiders tell Carmela Mendoza how the industry in France has shifted amid political and fiscal changes and why sustainability has become a much bigger play

n 15 April, three days year, a 13 percent jump from the previous election of Macron as president in 2017 before Private Equity year’s €16.5 billion and the highest ever has totally changed the attitude of for- International gathered since industry association France Invest eign investors toward France – from the four French private began tracking data in 1996, according to measures to attract talent into technology equity veterans to- its Activity of French Private Equity in 2018 or venture companies, to the end of the gether in Paris for a report. wealth tax.” Odiscussion on the market, a massive blaze The industry is also delivering: French Many funds did not want to touch hit the 850-year-old Notre Dame Cathe- private equity has generated a net internal France from 2010 to 2016, he says, with dral, destroying its iconic spire and a large rate of return of 10 percent-plus over 10 most London-based pan-European funds part of the roof. Thousands of Parisians years, data from France Invest show. looking almost exclusively at northern Eu- watched in horror as flames engulfed the Eddie Misrahi, president and chief exec- rope. “Brexit first happened, then Macron gothic masterpiece. utive of mid-market firm Apax Partners, says was elected nine months later and sudden- When we met on a warm spring after- the upward trajectory of French private eq- ly everybody wanted to be in France.” noon a few days later, Notre Dame and its uity is the result of the natural evolution of François Jerphagnon, managing direc- imminent restoration was on everyone’s the industry, partly helped by Brexit, which tor and head of expansion at Ardian, adds: minds. While there is no industry-wide ef- has reduced the number of deals available in “The question five years ago in terms of fort to aid the renovation of the cathedral, the UK, Europe’s largest market. asset allocation especially for large insti- roundtable participants said firms and in- “It’s also a result of a much more inves- tutions from the US or Asia, was, ‘Why dividuals were making their own contribu- tor-friendly environment,” he says. “The should we allocate to Europe? And why tions. KKR co-founder Henry Kravis, for France?’ That changed clearly two years example, has pledged $10 million. How- ago.” ever, consensus around the table was that Here’s why: the first several months of President Macron’s goal to get the cathe- Macron’s presidency were defined by his dral rebuilt in five years was not possible. pro-business economic programme, trans- Another point they have in agreement: 13% forming France’s wealth tax and easing tax- France private equity is on a tear. 2018 was es on companies. Rise in investor commitments to a record year for fundraising and deal ac- French private equity firms Sabina Comis, a partner at interna- tivity. French private equity firms landed from 2017 to 2018 tional law firm Dechert, says existing car- €18.7 billion of investor commitments last ried interest held by managers moving to

64 Private Equity International • June 2019 Analysis

PHOTOGRAPHY: ANDREW WHEELER

François Jerphagnon Sabina Comis Eddie Misrahi Marc Frappier

Managing director and head Partner at Dechert President and chief Managing partner and of expansion at Ardian executive at head of Eurazeo Capital Sabina Comis is partner Apax Partners François Jerphagnon joined at international law firm Marc Frappier joined Ardian in 2001. He began his Dechert. She advises Eddie Misrahi joined the Eurazeo career in 1994 at Caisse des French and international Apax Partners in 1991 as team in 2006. At Eurazeo, Dépôts et Consignations, companies on domestic and a partner, responsible for he has participated in where he implemented a international tax structuring in the TMT the investment or in new portfolio management that arises from complex sector and carrying out the oversight of Accor/ model. In 1996, he joined corporate transactions, investments in growth Edenred, Elis, Fintrax, company MACIF restructurings and financing and . He Foncia, IMSquare and Rexel where he became head of refinancings, often involving became managing director investments. He began his asset allocation and stock multiple sponsors. She also of Apax Partners in 2007 and career in 1996 as a financial management. has a wealth of experience chairman and CEO in 2010. auditor with Deloitte & in creating and structuring He started at McKinsey & Touche in Paris and New private investment funds, Company in Paris, before York. From 1999 to 2006, including joint ventures and working in the USA for a he worked for The Boston private equity vehicles. telecommunications firm. Consulting Group in Paris Misrahi was chairman of and Singapore and worked Association Française des on strategy and operational Investisseurs en Capital (now effectiveness assignments in France Invest) from 2007-08. various sectors.

June 2019 • Private Equity International 65 Analysis

France from abroad can now benefit from more favourable tax treatment. Tax re- Responding to cyber-crime forms have also further improved the on- shoring regime which may allow reduction The industry is totally underestimating the impact of in the overall income tax rate of a manager cybersecurity and it has been targeted because of the huge flows moving to France to less than 30 percent of capital, says Apax Partners president and CEO Eddie Misrahi. for a period of up to eight years. “These measures when added to the reduction of In recent years, a couple of its companies as well as its LPs have been attacked. “For the corporate income tax rate make France example, you make a capital call for €100 million and LPs get an email saying the a rather favourable environment for man- bank account has changed and it’s now in Hong Kong. We had that happen. It’s a agers and management companies to settle major threat to the industry,” he says. in.” Ardian and Eurazeo have also been hit by cybercrime. Marc Frappier, managing Investment activity has also been ris- partner and head of Eurazeo Capital, says the firm works two ways to bulk up ing in recent years, although it only saw a cybersecurity firm-wide and in its companies. Eurazeo subscribed to Cyber Angel, slight uplift last year to €14.8 billion from which monitors the dark web for all its portfolio companies to see if they can find €14.3 billion in 2017. Nearly two-thirds of any information leakage. It also has an on-demand cybersecurity company, which its private equity-backed transactions were in companies can call if an issue arises. “We’ve also had the same issue with funds flow small and medium-sized enterprises, and – the level of sophistication of these players is surprising,” Frappier says. were also largely domestic, with 84 percent Misrahi notes combatting cybercrime involves a trade-off between cost and of the deals recorded in French companies. protection. The answer, he says, is not so much in the intensity of investments in France private equity has always been cybersecurity, but in the firm’s processes such as double-checking phone calls and characterised by small-cap transactions, says wire transfers for capital calls and distributions. Marc Frappier, managing partner and head of Eurazeo Capital. The upper mid-market

“Wealth concentration and its distribution mechanism has been a long-term issue of the industry, not just in France but also globally”

MARC FRAPPIER Eurazeo Capital

66 Private Equity International • June 2019 Analysis

“The election of Macron as president in 2017 has totally changed the attitude of foreign investors toward France”

EDDIE MISRAHI Apax Partners

sees about 30 to 40 deals a year, while the Not that easy large-cap space is a finite market. GP activity in France – from domestic “It has been one of the largest markets to pan-European and global firms – has globally for a long period now and that’s been vibrant, but entering the market as why you also see big firms emerging. You a new manager is a challenge, partly due have firms that have built on this large mar- to competition. An increase in the number ket, but it’s still relatively small compared to of buyers has accelerated pressure on pric- the North American market,” he says. “You ing, which has consequently led to a rise in see more and more funds going outside of pre-emptive processes. France to look for opportunities.” For established managers, this is a pos- Eurazeo focused historically on in- itive, says Jerphagnon: “It reinforces the vesting in France but has in recent years winner-take-all concept, or at least the strengthened its presence across Europe, high barrier to entry. If you don’t have the North America and Asia. In early April, the network, if you’re a newcomer, it’s much Paris-listed investment firm picked up a more difficult to make new investments.” minority stake in Madrid-based MCH Regulation is also a deterrent: it’s be- Private Equity as part of its international- coming increasingly difficult for small firms isation plans. A month before, China In- to be compliant, Misrahi says. Participants vestment Corporation, the world’s second- agree France’s private equity regulatory largest , selected framework is tougher than a decade ago. Eurazeo to manage a growth fund of up to Comis, who advises French and inter- €1.5 billion for French and European com- national companies on domestic and in- panies that want to expand in China. ternational tax structures, says tax changes 2018 saw an increase for the third impact the industry on each one of its lev- consecutive year in the number of compa- els: fund structuring, management compa- nies backed to 2,218, growing 34 percent ny, deals and level. last year against the average for 2006-17, “All of these pull against each other. We ccording to data from France Invest. are facing on one side favourable tax treat- Tickets of less than €5 million account- ment for managers relocating to France, ed for nearly 80 percent of companies reduced corporate income tax rate, and backed and 14 percent of overall capital new tools to share capital gains with em- invested. ployees. On the other side is the need to

June 2019 • Private Equity International 67 Analysis

comply with the new tax rules on interest past 10 years they were stuck. If you sold deductibility limitations.” before, you would lose a lot of money. For On the latter, France has gone further example, 1.5 percent per year in 10 years is than the directive required, choosing to a big chunk of your wealth.” keep some of the existing limitations and Its recency means there has been little add them to those in the directive, Comis effect thus far. says. Thus, it is more challenging now to “The gilets jaunes, or yellow vest move- efficiently structure a private equity deal in ment, with a lot of people saying we should France. reinstate the wealth tax, is also creating an uncertainty which not a lot of people are More dealflow willing to bet on,” Misrahi says. While the industry is feeling the effects of fiscal reform, it also expects that the end of Spreading the wealth the wealth tax will have a positive impact The yellow vest movement has arisen amid on dealflow. Macron’s pro-business reforms. It began in Called Impôt de solidarité sur la fortune, November last year initially as a fuel tax the wealth tax was first introduced by the protest, which has now morphed into a Socialist Party in the 1980s and levied on wider anti-government movement against individuals with assets above €1.3 million. tax reforms. Its main complaint: lower- and In 2017, the French parliament scrapped middle-income France is taxed unfairly in 84% of companies backed in 2018 are based in France (% of invested companies) the wealth levy on everything except prop- favour of the rich. erty taxes, while a 30 percent flat tax rate Private equity’s role in wealth concen- was introduced on capital gains, dividends tration and distribution is front of mind for World Europe and interests. the roundtable participants. 6% 10% Family businesses used to be immune Jerphagnon says: “One topic we see to the wealth tax as long as they kept hold now is how could we align as much as pos- of the business, Misrahi says. His firm, sible the interest of the funds and the em- Paris-based Apax Partners, is deploying its ployees, not just the fund manager and the 2016-vintage €1.03 billion Apax France IX, top management of the company.” targeting investments in small and mid-size Ardian pioneered in France the practice companies in Europe that focus on TMT, of sharing a portion of the capital gains on consumer, healthcare and services sectors. successful exits with every employee of the In his view, the end of the wealth tax companies involved and has done this since means, in theory, there should be a lot 2008. France more dealflow. “Families can now sell and Although Jerphagnon declines to ex- 84% diversify their asset base because for the plain on how this is done, he says the firm

A record €18.7bn was raised, nearly 50% from foreign LPs PE invested €14.7bn in 2,218 start-ups, SMEs and mid-caps in 2018 (capital raised, €bn) (amount invested, €bn and number of deals) Amount invested Number of deals

20 16 2,400

16 12 1,800

8 8 1,200

4 4 600

0 0 0 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 Source: France Invest and Grant Thornton

68 Private Equity International • June 2019 Analysis

“We have to invest responsibly to create lasting value for all stakeholders. Our responsibility goes far beyond creating financial value”

FRANÇOIS JERPHAGNON Ardian

believes there is no way it can turn its back the private equity associations are doing a la Transformation des Entreprises or Plan on having a sustainable private equity busi- good job of showing wealth is being creat- for Business Growth and Transforma- ness. “We have to invest responsibly to ed for the employees and for job creation, tion law was proposed in June last year, to create lasting value for all stakeholders. there’s more to be done. Raison d’être – hav- make companies fairer, better funded and Our responsibility goes far beyond creat- ing purpose beyond making money – has less overburdened with obligations. One ing financial value.” always been a big debate in France and a of its aims is to make companies do more Wealth concentration and distribution part of the PACTE law proposed last year, than simply seek to make a profit. It will has been a long-term issue for the industry he adds. also abolish the employer’s contribution globally, notes Frappier. While he believes The Plan d’Action pour la Croissance et on profit-sharing plans for businesses with

2018 saw strong growth in investments in digital technology (amount invested, €bn)

2017 2018

0 1 2 3 4 5

Industrial goods and services & chemical

Consumer goods and services

Medical and biotechnologies

IT and digital

Financial services and transport service

Telecom

Other sectors

Public works/construction

Energy

Source: France Invest

June 2019 • Private Equity International 69 Analysis

“These measures when added to the reduction of the corporate income tax The Definitive Guide to rate make France a rather favourable Carried Interest environment for managers and Best practices for GPs, LPs and management their advisors This groundbreaking title by Mariya Stefanova of companies to settle in” PEAI is packed full of guidance and best practice approaches that will demystify the subject, help SABINA COMIS practitioners peel back the layers of the calculation, and Dechert aid understanding.

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