The situation funds market - France (2024)

1.2 Restructuring in Europe concerns millions of workers

There are many private equity funds in Europe. These funds have substantial resources at their disposal, enabling them to invest in LBOs (***) in companies that are doing more or less well. Turnaround is generally not their core business, and is therefore relatively neglected. Acquisitions tend to be made in companies with growth potential, but which are not in dire straits.

Eurofound, a European foundation for the improvement of living and working conditions, lists the main cases of restructuring in Europe over the last two decades.

Number of cases of job losses or job creations (***) during company restructurings Europe, **** - **** Source: ****

These data are also available by sector, providing an overview of those particularly exposed to downturns. Generally speaking, industry alone accounts for almost **% of job losses during turnaround operations, and just over **% of job creations. Financial services, transport, warehousing and retailing are next in line for job losses (***).

Number of turnarounds in Europe Europe, **** Source: ****

Looking at Europe in ****, we see that industry remains the sector most affected by downsizing, accounting for over a quarter of the total.

1.3 IN France, industry is the preferred sector for turnaround funds

Number of job losses (***) during restructuring of ailing companies France, **** - **** Source: ****

Since ****, Eurofound has recorded *,*** restructuring cases involving more than *** employees in France. In the context of bankruptcies, closures and relocations, industry is the sector most affected by restructuring. This sector is particularly hard hit by competition from low-wage countries. The turnaround mission generally involves restoring competitiveness to these companies.

Number of cases of job creation (***) during company restructurings France, ****-**** Source: ****

Between **** and ****, the number of jobs created (***), while other sectors post more modest figures, demonstrating a notable disparity in the impact of these restructurings on employment.

Funds under management of selected turnaround funds World, ****, US$ and € million Source: ****

However, the nature of the market makes it particularly difficult to determine its size . Very few companies are currently taken over by turnaround funds, leaving room for all potential entrants. What's more, fund performance is potentially unlimited, since it depends on the fund's ability to turn around the acquired company to a greater or lesser extent.

Perhaps the most relevant criterion is the amount of funds under management by turnaround funds. Few of them provide such data. On the whole, French funds such as Alandia and Aryes are relatively small ...

2.1 Business failures in France

The demand for turnaround funds is represented by the weakness of companies in the economy. This can be determined by two indicators: the number of bankruptcies and employment trends in France.

During a slowdown in economic growth, or even during a recession, opportunities multiply for the funds. They choose targets whose difficulties are deemed to be remediable.

The Banque de France provides a detailed overview of bankruptcies over the past two years, with data on the sectors and sizes of companies most affected.

Cumulative business insolvencies over ** months France, ****-**** Source: ****

In December ****, the construction, trade, car repair and other sectors show notable figures, indicating some instability. The same trend continues in December ****, with still high figures in these key areas, suggesting continuing challenges.

The significant number of bankruptcies in the construction, trade, repair and automotive sectors suggests a potential pool of businesses to be taken over. However, these sectors are capital-intensive, requiring substantial investment. Turnaround funds need to be particularly vigilant in determining whether a company's difficulties are cyclical or structural, the latter making turnaround more complex.

Despite a decline in insolvencies in **** and ****, the following years were marked by a large number of companies surviving thanks to government aid, ...

2.2 The preferred targets of turnaround funds

The targets of turnaround funds often share a number of characteristics:

Sales of several tens of millions of euros Investments of up to a few tens of millions of euros

In detail, the values chosen by turnaround funds vary according to the size of the fund and its investment strategy (***).

Source: ****

2.3 The impact of the pandemic on the turnaround market

The pandemic has had a considerable impact on the turnaround market. The succession of confinements and restrictive measures suggested that we would see a record number of bankruptcies in **** and ****. Records were indeed reached, but not those expected. In fact, in **** and ****, France saw fewer business failures than in the previous ** years. Whereas in ****, over **,*** bankruptcies were recorded, in **** only **,*** businesses defaulted.

This record is due to the numerous aids granted to companies by the State to cope with the pandemic. This becomes clear when we look at the trend in insolvencies by sector: the sectors receiving the most aid are those which have seen their number of bankruptcies fall the most.

Fall in the number of receiverships opened, by business sector France, for liquidations opened between March **** and April ****, with **** as the reference year, % Source: ****

Still according to France TV, insolvencies mainly concern SMEs and sole proprietorships, since they account for **% of the cases handled in commercial courts. Among the large companies placed in liquidation or receivership are Camaïeu, Bio C'Bon and Presstalis. These companies were already in bad shape before the start of the crisis.

Although the number of bankruptcies has fallen sharply over the past two years, ...

3.1 Value chain

Company turnaround remains a particularly complex sector, requiring a very good understanding of the law and relevant technical skills among other things. The AER provides an overview of all the players involved in a company turnaround.

During a turnaround or restructuring, the process involves several key players, each playing a distinct role at different stages:

Judicial administrator: Usually intervenes at the beginning of the process to manage the day-to-day affairs of the distressed company, overseeing the restructuring plan. Mandataire judiciaire: Acts as a creditors' representative, working with the administrator to protect the financial interests of stakeholders. Auditors and financial advisors: At the start of the process, they carry out an in-depth analysis of the company's financial situation, identifying critical points and suggesting corrective measures. Banks: provide essential financial support throughout the process, whether through loans, debt restructuring or other mechanisms designed to stabilize the financial situation. Investors (***): often intervene during the process with capital injections to finance restructuring and ensure business continuity. Crisis managers and operational consultants: Intervene when operational and strategic changes are required, implementing measures to turn the company around. Law firm: Provides legal advice throughout the process, from negotiating agreements with creditors to ensuring compliance with applicable ...

3.2 The turnaround sector is still relatively confidential

Breakdown of capital raised by private equity type France, ****, as % of total Source: ****

Despite the sharp increase in the number of restructurings during ****, the selected data are from ****, since since ****, turnaround capital has been included in buyout capital.

In ****, the breakdown of capital raised in private equity in France shows a marked predominance in expansion capital with **%, underlining the emphasis placed on supporting growing companies. Capital-transmission follows closely at **%, reflecting substantial interest in changes of ownership. Innovation capital accounts for **%, underlining the importance attached to early-stage companies. Turnaround capital, on the other hand, is less significant, accounting for just *% of investments, indicating a relatively low level of interest in restructuring companies in difficulty.

However, in view of recent trends, this percentage may be set to rise slightly.

According to the AFG (***) and turnaround funds. [***]

Source: ****

French turnaround funds are relatively few in number: only ** managers are listed by ARE (***) as investors. [***]

Competition is not necessarily fierce between the players in the sector, since each fund also chooses its targets according to human criteria (***). The large foreign turnaround and private equity funds represent a certain threat due to their size. They have the financial resources to invest in larger projects than smaller ...

3.3 The turnaround's favorite sectors

Number of turnarounds by business sector France, ****-**** Source: ****

As explained in the demand section, turnaround funds primarily target companies in difficulty, and therefore have preferred sectors.Manufacturing is the first sector targeted, followed by information/communication and retail. Between them, these three sectors account for **% of turnarounds over the last five years. This is due to the high intensity of low-skilled labor in these sectors (***). The manufacturing industry is also suffering from competition from cheaper labor from developing countries.

Turnaround operations by type France, ****-**** Source: ****

An in-depth analysis of turnaround operations in France (***), suggesting an acute desire to conquer new territories and markets. This preponderance may reflect an optimistic view of growth opportunities, stimulated by an active search for new economic levers.

At the same time, internal restructuring (***) denotes a deep-seated desire for adaptation and efficiency within companies, perhaps reflecting an anticipation of changing economic or technological paradigms. This strategic choice underlines an ongoing quest to optimize internal resources in order to remain competitive.

Bankruptcy (***), on the other hand, can be interpreted as the result of deeper financial and structural challenges, exposing companies' limitations in the face of economic turbulence or obsolete operating models.

4.1 Turnaround funds

Turnaround funds always make a capital contribution that enables them to take control of the company, or at least to have decision-making power. This contribution also enables the company to steer its strategy and initiate the restructuring process. Sometimes, debt is added to the investment to enable the turnaround fund to invest in larger companies (***). [***]

How an LBO works: the fund repays the borrowed debt out of the company's cash flow Source: ****

Leverage (***) is generally low in turnaround capital. Companies are often in financial difficulty and unable to repay large loans immediately.

Number of LBOs announced for French companies France, ****-**** Source: ****

The number of LBOs in recent years has risen sharply, from *** in **** to *** in ****, before dropping to *** in **** due to the health crisis. This progression demonstrates the attraction of this type of transaction for investment funds. In ****, around *** deals were recorded[***], the highest level ever, but this did not prevent a meteoric fall in the number of LBOs carried out at the end of ****, after a record half-year of *** transactions. This fall worsened during ****, due to the scarcity of bank loans and the tightening of repayment conditions caused by rising interest rates. As LBOs are already risky by nature, ...

4.2 Exit or divestment procedures

When an investment fund (***) wishes to recover the profits from its investment after several years, there are several possible methods. [***]

Initial public offering

The first is to float the company on the stock market as part of an IPO. This presupposes, however, that the financial markets have a suitable compartment for smaller companies.

In France, the Euronext stock market has a compartment B for companies with a market capitalization of between €*** million and €* billion, and a compartment C for companies with a market capitalization of less than €*** million. [***] For unregulated listings, there are * financial markets: Euronext Access and Euronext Growth, both of which are used in particular by SMEs.

Sale to a manufacturer

According to the AFG, this is the most common form of exit. The turnaround fund has turned the company around and made it much more attractive to industrialists, who see it as a possible source of synergies.

Butler Capital Partners, for example, sold Giraud, in which it held a **% stake, to Géodis, the freight and logistics subsidiary of SNCF. [***]

Sale to another investor

It's important to distinguish between the primary and secondary markets in private equity. The primary market is made up of investors who take a ...

4.3 Current status of insolvency proceedings

There are a number of collective procedures that can be envisaged by a company facing difficulties. Some are amicable, while others are collective and involve legal action.

Source: ****

Amicable procedures

Recourse to an ad hoc mandate or conciliation enables the company to negotiate with creditors to reach an agreement on repayment terms.

Ad hoc mandate

When a company encounters financial difficulties, it can request the appointment of a mandataire ad hoc to assist it in renegotiating its debts. [***]

Conciliation

Conciliation is an amicable procedure available to debtors carrying on a commercial or craft activity, experiencing difficulties in repaying their creditors but not having been in cessation of payment for more than ** days. [***] The conciliator's appointment can last no longer than * months and aims to negotiate with creditors the payment of debts.

In ****, *,*** conciliations took place in France according to data from the CNAJMJ(***), for companies representing sales of *.** billion euros.

Insolvency proceedings

Three legal procedures can be set up, though they differ in their implementation and opening conditions. Since March ****, specialized commercial courts have been set up for ETIs and GEs (***). [***]

Number of jobs threatened by insolvency proceedings France, **** Source: ****

In ****, the trend in insolvency proceedings in France revealed that each ...

4.4 Digital is key to turnaround

Turnaround funds in France can now rely on digital technology to boost a company's organic growth. [***]

Indeed, according to a study by the Capgemini Group, companies' use of new technologies (***) enables them to perform **% better than the average for their sector , and are better valued, by an average premium of **%.

A company's digital maturity can take two forms:

Digital intensity, which corresponds to the tools used by the company Theintensity of the transformation process, which groups together all the resources put in place to increase digital intensity

Some sectors use new technologies more than others: high-tech and banking activities have a high digital intensity, which is not the case for manufacturing or pharmaceuticals.

Share of companies with high digital intensity, by sector France, ****, % Source: ****

This underlying trend has been accelerated by the Covid crisis. Without the possibility of selling via traditional channels (***), many companies have had to turn to online sales. A McKinsey study estimates that the health crisis accelerated digital adoption in Europe by * years compared with the growth seen in previous years.

Average proportion of customer interactions that are digital World, ****-****, % (***) Source: ****

4.5 Supply impacted by rising interest rates

The upsurge in restructuring, amplified by the rise in interest rates, is clearly evident in Groupe Casino's setbacks. Its financial vulnerability, imprudent international strategy and lack of modernization led to speculative debt that was bearable at low rates. Abundant money favored poorly performing companies, turning them into "zombies". Rising interest rates revealed their weaknesses, prompting drastic restructuring and asset segregation. Although employees are the first to be affected, this may mark the beginning of a necessary clean-up in several sectors, with the hope of a resumption of productivity gains, even if monopolies remain difficult to shake without more targeted government action[***].

Rising rates echo the end of state-guaranteed loans

Evolution in volume and value of PGEs granted France, ****-****, in € thousands Source: ****

Breakdown in volume and value of PGE granted, by type of business France, ****-****, in Source: ****

Introducedon March **, ****, the "State Guaranteed Loan" (***) had been distributed by December ****, and **% by the end of June ****. In view of the continuing health crisis, the possibility of contracting an EMP has been extended until June **, ****, before coming to an end following the European Commission's decision of November **, ****. The breakdown by type of beneficiary company and the cessation of aid in **** correspond to an ...

5.1 Particularly developed regulations for companies in difficulty

Eurofound groups together a number of rules that apply when restructuring a company. These rules are generally restrictive and derive from the French Labor Code. Indeed, priority is given to employment in France. The most important are as follows:

Guaranteed wages in the event of bankruptcy : whatever the duration of their employment contract, employees are entitled to a maximum wage. Thus, if the employment contract with the employee is more than * years old at the time of the declaration of bankruptcy, the employee can benefit from nearly **,*** euros per year. This amount is financed by the AGS contribution. Flexible working hours: **** saw the implementation of the collective performance agreement, which aims to adjust employees' working hours and remuneration, and must be signed by one or more trade union organizations with a majority in the company, or by employee consultation in their absence. This agreement can include clauses that are incompatible with or contrary to the employee's employment contract, which the employee must accept or risk being dismissed. [***] Collective redundancies: these must comply with specific conditions if the company has more than ** employees. Staff representatives or the CSE (***) give a consultative opinion on the decision. [***] In the event of justified dismissal, there ...

5.2 The consequences of the PACTE Act and the Restructuring and Insolvency Directive

The PACTE law, adopted on April **, ****, slightly modifies procedures in the context of turnaround.

In the context of receivership, the debtor may propose one or more receivers, enabling him to work in partnership with the same person who accompanied him during the safeguard. [***] Simplified judicial liquidation is now compulsory for companies with a maximum of * employees and sales of less than ***,*** euros. This simplified procedure, compared with the normal one, can be shortened (***).

The European "Restructuring and Insolvency " Directive, which will be definitively adopted in June ****, aims to limit barriers to the movement of capital intended for restructuring companies by guaranteeing, in particular, the right to a fair and equitable distribution of assets. restructuring companies, notably by guaranteeing in all countries an effective preventive restructuring framework and greater efficiency in restructuring procedures. [***]

When drawing up restructuring plans, the economic situation of the debtor and its employees, as well as the causes and extent of the debtor's difficulties, must be specified. This directive comes at a time when governments are trying to step up their efforts to encourage turnaround in Europe.

This directive, available on Eur-Lex, also proposes a European framework for insolvent but honest entrepreneurs: * years after their declaration of insolvency, ...

6.1 Segmentation

* financing provided by Alandia

• H.I.G. Europe
• Butler Capital Partners
• FCDE
• Aryes
• Alandia Industries
• Andera Partners
• Ardian
• EIM Capital
• Excelrise Investment
• Siparex
• Hivest Capital
• Impala Holding
• Open Gate Capital
• Prudentia Capital
• Renaissance Capital
• UI Investment
• Zalis