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Private equity overview - France

The French private equity market is developing fast, with independent and semi-captive private equity firms becoming the the dominant type of investor. Here, the EVCA provides a comprehensive overview of the market, including tables and charts on funds raised and types of investment.

The French private equity industry is comprised of three principal fund structures: Fond Communs de Placement à Risques (FCPR), Fond Communs de Placement-Innovation (FCPI) and Société de Capital Risque (SCR). These investment vehicles are increasingly focusing on investments in a particular industry sector or stage of financing. This trend towards greater specialisation continued to be a feature of the private equity market in 1999. The large institutional investors still play a major role, participating either by sponsoring externally raised funds or via dedicated subsidiaries.

There was a significant increase in the number of funds operating in the market in 1999. This is largely due to a favourable economic environment, a substantial reallocation of resources by the large investors into private equity investments and the rapid expansion of the European high-growth stock exchanges which are providing improved exit opportunities for private equity investors.

At the same time corporate venturing has continued to develop and new types of investment vehicles are emerging such as funds dedicated to seed capital, and business angel groups. Furthermore, there is a growing number of networks, forums and web sites that bring together private equity investors and individuals or companies seeking funding.

1999 saw another year of rapid expansion in the French private equity market, a trend that seems set to continue in 2000. The increase in the number of funds allocated to venture capital for early-stage investments (which doubled during the year) was the key driver of the market in 1999.

Sources of Capital
1999 proved to be an exceptional year for private equity fund raising, with the total amount raised increasing from FF25.2bn in 1998 to FF28.1bn This increase was largely attributable to independents and semi-captives, who raised a total of FF16.4bn. Funds raised by captives accounted for FF4.9bn. The remaining amount was made up by realised capital gains available for reinvestment, FF6.7bn. Excluding this element, funds raised totalled FF21.4, compared to FF17.1bn in 1998. 1999 confirms a trend identified in 1998: independent and semi-captive organisations have become the dominant investor type, representing 58.5 per cent of the capital raised during the year.

The banks, through their semi-captive subsidiaries, continued to provide the largest share of funds, accounting for around FF7bn of the total amount raised, similar in relative terms to 1998 (25 per cent). The amount raised by insurance companies increased both in absolute and relative terms from FF2.8bn in 1988 to FF4.1bn (from 11. 1 to 14.8 per cent). The pension funds saw their contribution decline from FF3.2bn to FF2. 6bn, but they remain an important source of funds. The amount raised from corporate investors was significantly down on last year, FF1.3bn compared to FF2.8bn in 1998; part of this amount was invested directly through their own corporate funds. The contribution made by funds of funds is also notable. This investor category was included for the first time in 1999, and so comparison with 1998 is not possible.

Funds raised from within France account for almost three quarters of the total amount (FF 21.6bn). Other countries contributed FF6.4bn (23 per cent). It is interesting to note that while these funds came largely from other European countries (FF3.5bn), 1999 saw a relative increase in the proportion provided by non European countries, representing 45 per cent of the funds raised from other countries compared to 39 per cent in1998.

With regard to the expected allocation of funds, a total of 25.8 per cent is designated for investment in high-tech (FF7.2bn) compared to 15.3 per cent in 1998 (FF3.9bn). This represents an increase of 87.7 per cent. Although the majority of funds are expected to be dedicated to non high-tech investments (75 per cent), the total amount allocated decreased by two per cent on last year's figure.

Investment patterns
The total amount invested in 1999 was FF18.5bn, a substantial increase of over 58 per cent. The number of investments increased by 65 per cent, representing investments in 2,100 companies. The proportion of initial investments also increased to account for 70 per cent of the total. The average deal size remained stable, at around FF7.5m.

Independent funds were the dominant investor type in 1999. They invested FF11.2bn, accounting for 60.7 per cent of total amount invested. semi-captives invested FF5.7bn, with captives accounting for only FF1.5bn (eight per cent in relative terms).

In terms of amount invested, expansion and buy-outs both represented 38 per cent of the total, each with FF7bn Both seed and start-up investments also grew significantly, doubling in value to FF3.3bn (18.5 per cent in relative terms).

Non-syndicated deals decreased significantly in 1999, accounting for only 44.7 per cent of total amount invested compared to 73.8 per cent in 1998. Conversely, national syndications saw their relative share increase. The level of trans national syndication remained relatively stable.

There was a strong increase in the amount invested within France: FF14.7bn compared to 7.8bn, almost 80 per cent of the total amount invested in 1999. The amount invested in other European countries also increased slightly. However, investments in non-European countries decreased in both absolute and relative terms.

High-tech attracted the highest share of investments, accounting for FF5.3bn (28. 7 per cent) invested in 710 companies (33.3 per cent). This is largely attributable to the huge increase in the amount invested in communications which rose from FF0.6bn (5.5 per cent) to FF4.8bn (26 per cent). Another sector which saw a substantial increase in investments was industrial products and services, rising from FF1.2bn (10.4 per cent) to FF3.1bn (16.7 per cent). Finally, it is worth noting the decrease in the amount dedicated to consumer related investments, which fell from 21.6 to 12.1 per cent.

Legal and Fiscal Environment
1999 saw the introduction of several measures encouraging venture capital investment.

These measures were introduced by the 'Loi Allègre sur l'lnnovation' passed on July 12, 1999. They include:

• the possibility for young companies to adopt the system of 'Société par Action Simplifiée', with fewer requirements than for limited companies
  
  
• an adaptation of the operating rules for the FCPI
  
  
• an increase in financial intervention by public entities through, on the one hand, the creation of three seed capital funds of funds investing in private funds and, on the other hand, the setting up of incubators within academic institutions.

Regarding the investment management field, a new measure and two tax reforms are worth noting. The measure authorises the creation of FCPRs with less stringent requirements (prior authorisation by the Commission des Opérations de Bourse is no longer required) and the tax reforms exempt certain revenues of FCPR from taxable income and enable their future distribution by national ban king networks.

On the other hand, the reform of stock option plans is yet to be completed. However, the application requirements for the system called Bons de Souscription des Parts de Créateurs d'Entreprises (BSPCE) have been expanded and extended to the end of the year 2001. These two factors have contributed to the growing success of this particular system put in place in December 1997.

Divestments
Divestments at cost in 1999 increased from FF12.8bn to FF15.6bn Sales to another venture capitalist increased from FF0.2bn in 1998 to FF1.4bn in 1999 which is the highest increase in relative terms.  This development is largely explained by the rise in the number of divestments by means of a second LBO.  This method of divestment overtook IPOs as a chosen exit vehicle.  The amount of divestment by trade Sale remains at about FF9bn, but in relative terms this method of divestment declined in importance, from 72 to 58.3 per cent of the total amount invested.  A number of particularly large trade sales which took place in 1988 explain the decline in the average value of divestment by trade sale, from FF35m to FF20m.  Finally, divestments by sale of quoted equity increased from FF1.8bn in 1998 to FF2.4bn in 1999, a phenomenon which might be explained by the expiration of 'lock up' periods.

FUNDS RAISED
Funds (in FF x 1,000)

This extract is taken with kind permission from the EVCA Yearbook 2000

The European Venture Capital Association's mission is to promote globally and to facilitate the development of the European private equity and venture capital industry through active lobbying and development initiatives. It seeks to help create an entrepreneurial environment in Europe and promote European private equity and venture capital to institutional investors worldwide. For more information, please visit www.evca.com
         
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