Expert commentary: Capzanine roots out hidden deals

Laurent Bénard capzanine 180

Laurent Benard

Paris-based Capzanine is one of the longest-established private debt providers in France, having been founded in 2004 by Christophe Karvelis and David Hoppenot. In October 2015, Eurazeo and AXA France, each took a minority stake in the firm and pledged a combined €380 million to support its 2016 fundraising efforts. We spoke to Laurent Benard, managing partner and global head of private debt, to find out more about the nature of the French private debt market.

Could you tell us a little about the dynamics of the French market, and how it compares with the rest of Europe in terms of size and level of opportunity?

The French market is one of the two largest in Europe. It is roughly the same size as the UK but by far the largest euro-denominated market in the private credit space. We have been present in the market since 2004, and since 2010 we have witnessed a sharp increase in activity due to banking disintermediation. The private debt segment in France is growing at a rate of over 20 percent on a year-on-year basis.

I think this is due to two structural factors. Firstly, banks still represent around 90 percent of the credit market but, overall, their role is decreasing due to Basel III constraints. Even if we are not yet at the UK level, where private financings represent around 30 to 40 percent, we are catching-up fast, which explains the growth of the market.

Secondly, the private equity market is very active. A recent study showed France gathering one-fifth of Europe’s dry powder so far this year. More private equity deals is a clear driver for more financings. We have seen a big increase in private equity activity in the last couple of months. All the indicators are positive.

How important is it to be a local player in France? What are some of the advantages of being familiar with the landscape?
France is a difficult market. Most European players are London-based, very used to the Anglo Saxon way of doing business, disintermediated and very transactional. France is still very much a relationship-driven market. The idiosyncrasy of the market creates a natural barrier to entry. You have to be local with sizeable resources on the ground to access off-market opportunities from across the country. In the mid-market you have to speak French, be around the corner from the CEO and provide flexible solutions. This is one of the reasons why we provide both unitranche and mezzanine from the same vehicles.

Being headquartered in France, we have seen 350 potential opportunities over the last 12 months. Half of these are outside the Paris area. If you only have a handful of staff based in Paris, how can you cover all of France?

Direct lending is all about minimising losses and working with quality borrowers. Being local and in the market for over 10 years gives us strong views of the sectors and companies we want to lend to. Often we have been following a company for over five years prior to lending.

When was Capzanine formed, and what would you identify as some of the key landmarks the firm has passed since then?
When we created Capzanine, in 2004, our aim was to provide long-term financing solutions to small and mid-market French companies. This requires flexibility and a multi-product solution. After 2010 we evolved from focusing solely on equity and mezzanine and added unitranche and senior financing.

Today, we are one of the oldest debt funds in France and have raised €1.5 billion since inception. Our 18-strong team offers investors specialisms across three products: i) equity and sponsorless mezzanine; ii) sponsored private debt through senior, unitranche and mezzanine; and iii) senior, corporate debt. The sponsorless fund focuses on companies with EBITDA under €10 million and we recently closed our fourth vintage at €350 million. Our private debt strategies focus on companies with EBITDA above €10 million.

Last year was also a key year in our history. We welcomed two new minority shareholders in our management company: Axa and Eurazeo. Axa has been an LP of ours for 11 years.

Could you explain the firm’s strategy? For example, the type of situations it will lend to and for how long it will stay invested?
In private debt, we are trying to generate high single-digit returns for our investors by lending to sponsored French SMEs. Our focus is mainly on senior financings but we can also provide mezzanine when required. Our deal flow is proprietary in the majority of cases and we are typically the arrangers of our financings. We have a relatively low risk profile and feel that having a private equity GP in the transaction greatly reduces the default risk. We can provide senior, unitranche or mezzanine financings.

A typical Capzanine situation is a company i) we have known for 5-10 years, and perhaps we may have been involved in the past as an equity holder or a lender; ii) with a sponsor which we have typically already done business with; and iii) in a resilient sector where we have a strong, well-diligenced view of the market.

Marle, a global leader in the orthopaedic industry, is a very good example. We completed the unitranche financing in June this year. IK was the sponsor and a fund manager we have successfully worked with in the past. We have known Marle since 2009 and been lenders since 2014. When we are happy with a financing, we like to stay on the balance sheet for a long time, hence we like repeat transactions.

How do you expect the market to evolve over the coming years?
The French economy is strong for private financings and less volatile than others. It’s not hugely dynamic in terms of GDP growth but it is stable and therefore a very interesting market for credit. We believe this will continue for the foreseeable future. In addition, the private financing market share will continue to grow given that we’ve started from a low point and given that the equity market is one of the most mature in Europe.

Volatility within credit markets will remain and so will the uncertainty about overall financing for private equity sponsors. Hence, to be able to offer a one-stop private financing solution will become even more important that it is today. We expect France to remain the largest euro-denominated private debt market.

This article is sponsored by Capzanine. It appeared in the Mid-Market Special supplement published with the December 2016 issue of Private Debt Investor.