In keeping with the tourist crowds, Andy Thomson also set out to discover the latest fashions in Paris. For private equity firms facing uncertain times ahead, standing out from the crowd has never been more important.

Raising money from domestic LP groups was, for French mid-market private equity outfit Pragma Capital, something of a breeze. Having launched its first independent fundraising in January 2007 (the firm's partners became fully independent from Crédit Agricole and Crédit Lyonnais in 2004), the firm was able to announce a first closing on €200 million ($316 million) just two months later. Completing the fundraising from non-French sources was, in partner Stéphane Monmousseau's words, “more difficult”. In the end, things worked out fine. Pragma attracted investment from LPs in six different European countries, bringing its total to €345 million – just shy of a €350 million hard cap. But it took until February this year for the fund to be wrapped up.

Pragma took the geographic diversification of its investor base very seriously, hiring Deloitte's UK fund placement business to advise it on the non-French leg of the fundraising. Monmousseau reveals that the firm expanded its horizons beyond Europe to LPs based in Asia, “but it's a bit too early for them to invest in country-focused funds in Europe, they'll only tend to do pan-European”. The US was never part of the plan, as expectations were not high that trawling the US market would be worth the considerable time and effort it would entail. But, for this GP at least, diversification of the investor base is a crucial part of the business plan.

Not that Pragma's investor base is typical. Monmousseau claims that having as high a percentage of international investors as his firm now has is “very rare” for a French mid-market fund. It's not hard to imagine this changing over the coming years, however. Bruno Deschamps, the former Clayton, Dubilier & Rice executive who now heads up 3i's operations in Paris, says the impression has been created of “a highly, competitive market” in France. But the reality, he adds, is of a private equity market capable of delivering outperformance relative to many other Western European equivalents. Figures from French private equity association l'AFIC show top quartile French funds delivered an average IRR of 33 percent in the ten years to 2006.

Not surprisingly, some problems are expected to surface at the larger end of the buyout market in France. The country saw debt multiples soar to unprecedented heights last year, and there's little doubt among professionals on the ground that there will be a day of reckoning for over-leveraged portfolio assets at some point in the future. So far, though, the negative publicity in the business pages seems to have been reserved for falling valuations of listed stakes, such as Wendel Investissement's steadily accumulating interest in Saint Gobain (see p 12). And stock market valuations, as well we all know, can go up as well as down.

Perhaps the greatest strength of the French private equity market at a time like this is the predominance of mid-market funds. In recent years, the plethora of funds battling for a slice of the middle ground has been cited by sources as a weakness. To return to Deschamps' quote above, “highly, competitive” is the type of description that has been frequently offered – and it's a slight that's been targeted at the mid-market every bit as much as the larger end. But what it means today is that few French funds appear to have been affected to a large degree by the credit crisis. And that may in turn mean international LPs looking at France country-focused funds with keener interest.

Monmousseau certainly appears relieved that last year's deal-doing environment is consigned to the past: “We managed to invest in three deals but prices went a bit crazy. Some deals were struck that didn't necessarily reflect the long-term value of the company.”

DOWN BUT FAR FROM OUTThe table shows that private equity deal value in France fell from $35 billion in 2006 to $23.4 billion last year. However, this still represents a strong new deal market compared with the years 2000-2005, when the highest value recorded was $18.9 billion in 2004. In terms of deal numbers, the 164 recorded was 16 deals more than the 148 completed in 2006 and just two below the 2005 tally of 166.Eric de Montgolfier, managing partner of Edmond de Rothschild Capital Partners, hints that a quiet time may be ahead for the market as vendors' price expectations struggle to catch up with reality. “Valuations have not decreased that much yet,” he says. “What you find is that conditions worsen and then some time passes before the perception of vendors worsens. At the current time you need to choose your assets very carefully.”

Announcement Date Deal Value $ (m) No.
2000 6,393 78
2001 1,506 37
2002 13,275 50
2003 5,920 62
2004 18,945 83
2005 10,877 166
2006 34,981 148
2007 23,377 164

THE HUNT FOR EXITSThe tables below show the reliance (over-reliance?) on secondary buyouts that the French market appears to have developed. Last year, in line with the previous year, saw over $16 billion worth of exits by this route – compared with just over $3 billion of trade sales and less than $1 billion of IPOs. It is expected that this trend will change markedly in 2008, with the lack of leverage putting financial buyers at a disadvantage relative to trade buyers. Cultivating fruitful relationships with trade will likely be crucial if French private equity firms are to maintain a steady flow of exits throughout this year.

Announcement Date Deal Value $ (m) No.
2000 1,261 4
2001 663 16
2002 673 12
2003 1,589 17
2004 2,463 13
2005 3,353 32
2006 6,248 32
2007 3,017 28
Announcement Date Deal Value $ (m) No.
2000 1,210 10
2001 n/a 1
2002 2,097 8
2003 2,179 12
2004 4,899 19
2005 5,210 43
2006 16,774 49
2007 16,163 41
Price Date Deal Value $ (m) No.
2000 467 4
2001 574 2
2002 51 1
2003 243 2
2004 1,471 6
2005 3,181 11
2006 3,698 8
2007 925 8