Overview of the PE industry in France
September 2018 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
September 2018 Issue
The private equity (PE) industry in France appears to be in particularly good health. 2017 was an exceptional year of growth for capital invested in France, whether in terms of funds raised, amounts invested or the number of transactions. This growth trend continued in the first half of 2018.
According to data published by France Invest (formerly the French Association of Investors for Growth (AFIC)), the approximately 300 French PE players raised €16.5bn last year, compared with €14.7bn in 2016 (and €5bn in 2012), of which nearly two-thirds (63 percent) came from French investors.
Over the past 12 months, a large number of transactions have been recorded. Moreover, recently larger amounts have been raised by start-up companies at quite high valuations.
This exceptional growth can be explained by different factors, such as an increase in the availability and origins of funds, and cyclical and structural factors.
Increase in the availability and origins of funds
There is more money to be invested in France into growing companies. European and French institutions, such as the European Investment Fund (EIF) and Bpifrance (a French public investment bank) are investing in French PE funds on a regular basis and institutional corporations are also investing into French funds.
Corporates seem to be more involved in the ecosystem than previously. They are regularly investing in French funds and some of them also have their own entity to invest directly in companies.
The number of French funds has also increased. Regarding investment in growing companies, in addition to VCs, business angels and family offices are also investing in French start-ups.
As a result, French funds have more money to invest and the number of investors is increasing.
Another factor to explain the good health of the French PE industry is investment by foreign VCs in the country, as well as the presence of foreign start-ups raising funds in France. Indeed, VCs observe that in their deal flow, they receive numerous presentations from foreign start-ups to raise money in France.
According to data published in EY Venture Barometer, by 2017, 34 foreign start-ups chose to set up in France, wishing to benefit from its favourable business environment. France now ranks second in Europe in number and value of venture capital operations, reaching €2.5bn in 2017 for 605 operations (an increase of 16.2 percent compared to 2016) and first in Continental Europe, followed by Germany. In this context, foreign venture capital funds are increasingly present. Recently, more transactions are financed with foreign investors as co-investors with French investors.
Data from EY Barometer and France Digitale in 2017 shows that 35 percent of start-ups were financed by at least one foreign fund in 2016, compared to 25 percent in 2014. The main characteristic of this dynamic is the type of operations in which foreign venture capital funds are interested. Indeed, their involvement takes place earlier in the development of start-ups. The digital sector represents 63 percent of the total amount raised in France in 2017 and is experiencing a 13 percent growth in investments compared to 2016. 2017 was also marked by the rapid growth of FinTech. Investment into FinTech reached €98m, a significant increase from 4 percent of the total capital raised in 2016 to 11 percent in 2017. Regarding the ranking of ‘unicorn’ companies, according to CB Insights 2017, only three unicorns are French – Blabacar, Criteo and Vente-Privée – compared to 22 in the UK. In this ranking, 41 percent of unicorns are US-based and 37 percent are Chinese. We hope that France will catch up if the business environment remains friendly. To this end, the €160m raised by music streaming platform Deezer in July is an encouraging sign.
Cyclical and structural factors
Over the last 10 years, France has endeavoured to expand its presence in the European PE market and, over the last 12 months, this expansion has been supported by a number of events.
The election of Emmanuel Macron as president, and the various reforms initiated and implemented by his government since 2017, have been favourable to the business environment in France.
Equally, despite fluctuations within global economic activity, the French government intends to consider the necessity of structural reforms in order to make France more competitive and business-friendly.
The regulatory framework offers a new choice of suitable and rejuvenated investment vehicles, including the FPCI (a French innovation-focused fund, which provides tax advantages to individuals), the ‘société de libre partenariat’ (SLP), which is a new type of French company created by the Loi Macron in 2015, in order to create a new category of alternative investment funds on the model of British partnerships, and the ‘organisme de Financement Spécialisé’ (OFS), which is a new type of specialised funding fund, which was created in January 2018.
In addition to previously existing advantages for start-ups, such as the status of ‘jeune entreprise innovante’ (for young innovative companies) or the ‘crédit impôt recherche’ (a research tax credit) to encourage innovation, the new labour and tax policies will have a positive impact on the trust and investments in France.
Regarding the Labour Law, historically, labour costs in France have acted as a major disincentive to investment, especially foreign investment. The reform aims to reduce certain labour costs, for example in capping labour litigation damages and by allowing companies to reach an agreement directly with their employees regarding work hours, pay and overtime.
The reduction of corporate tax, from 33 percent to 25 percent in 2022, comes second, together with the abolition of the ISF – a wealth tax on all assets, including companies’ shares, that has been replaced by the IFI, a wealth tax on real estate only – and the introduction of a ‘flat tax’ on individuals’ capital gains. Such reforms aim to make France a more attractive market.
The second event to consider is Brexit. Over the past year, global investments in Europe grew approximately 10 percent, compared to growth of 6 percent in the UK. Although not yet significant, a number of British investments have been made in France in order to gain a foothold in the EU and certain projects that naturally would have been developed in the UK previously are now coming to France.
The third element to consider is that the health of investments in start-ups in France has also been boosted by an active French start-up’s microcosm.
First, a major initiative is the creation of ‘Station F’ by Xavier Niel, which was inaugurated in June 2017. Station F is the world’s biggest campus for start-ups, gathering a whole entrepreneurial ecosystem under one roof. The facility provides accommodation for up to 1000 start-ups and early stage businesses, as well as corporate partners, such as Facebook, Microsoft and Naver, including desk spaces, private meeting rooms, dining facilities and a 370-seat auditorium.
The second major initiative is the work of ‘French Tech’ to promote the French start-ups’ ecosystem.
‘French Tech’ is a state initiative, established in 2013, which refers to a French label awarded to metropolitan centres to promote their start-up ecosystem. French Tech also refers to all those who work for French start-ups in France or abroad (entrepreneurs, primarily, but also investors, engineers, designers, developers, large groups, associations, media, public operators and research institutes), which are committed to the growth of start-ups and to their international influence, under a common brand ‘French Tech’ for innovative French companies. French Tech enjoys a strong international reputation.
For example, at the Consumer Electronics Show (CES), the world’s largest high-tech show organised every year in Las Vegas, in 2018 France was the second largest delegation for start-ups, just behind the US, and in 2017 and 2016, it was the best-represented European country, behind only the US and China.
Research and development (R&D) are France’s strengths. France has made the best progress of the top three European countries, ahead of Germany and the UK, in terms of locations or extensions of R&D centres. With 78 new projects, France is asserting itself as a competitive country in terms of innovation. The beginning of 2017 was marked by announcements of several major groups, including Facebook, Microsoft, Google, Fujitsu and Samsung deciding to open research laboratories in France. In May 2018, new investments were announced at the Tech for Good and VivaTech events. Following the ‘Villani Report’, the French government also announced a €1.5bn investment programme devoted to increasing artificial intelligence by 2022.
The interest for foreign firms to set up shop in France could also be explained by employees’ high quality training, especially among engineers, their costs and the employee retention rate, compared to Silicon Valley, for example.
Moreover, the expansion of start-up ‘culture’ among students and the improvement of specific training to manage start-ups has facilitated the emergence of numerous start-up projects and has thus led to a higher quality deal flow for VCs.
Previously, students of France’s prestigious universities called ‘les Grandes Ecoles’ were attracted to large companies or leading national departments. Today, many students’ mindsets have changed, various incubators have been created directly on the campuses of the ‘Grandes Ecoles’, and, as a result, students at the end of their training are ‘transformed’ into young entrepreneurs.
The mindset of French VCs is also evolving. In addition to their ‘pure’ investment into their portfolio companies, they try to find ways to help create value, and to offer their experience and networks to help them. Some of them are creating new types of organisations to work with their portfolio companies.
For example, some VCs have created online professional networks dedicated to their portfolio companies. One of which has built an internal operational team and a team of experts with years of experience to provide on-demand operational support to maximise the value and growth of its portfolio companies.
To conclude, we hope that all the initiatives undertaken will bear fruit and will continue to promote the growing role of the French PE industry and produce positive results for the economy.
Morgan Hunault-Berret and Isabelle Burel-Blasoni are partners at Villechenon. Ms Hunault-Berret can be contacted on +33 (0) 1 42 68 81 30 or by email: hunault.berret@villechenon.com. Ms Burel-Blasoni can be contacted on +33 (0) 1 42 68 81 30 or by email: iblasoni@villechenon.com.
© Financier Worldwide
BY
Morgan Hunault-Berret and Isabelle Burel-Blasoni
Villechenon