What led to the creation of the firm?
Astorg is a spin-off from the French conglomerate Compagnie de Suez. The group took a strategic decision 15 years ago to become a utility company focusing on water and energy, so it decided to offload all of its banking, insurance and private equity units. Since then we have raised four funds.
How does your investment strategy differ from other firms in the same space?
The first thing to emphasise is geography. Although we are very much a French private equity firm, we have always looked for French champions selling in global markets. The majority of Astorg’s portfolio companies generate more than two-thirds of their sales outside France. We have felt for many years that French GDP growth will be slow, so the only way to achieve capital gains is for portfolio companies to be active in emerging markets.
Regarding our sector preference, we prefer service businesses in niche markets with strong barriers to entry and a competitive position bolstered by high margins and solid pricing power. The reason we look for all that is that we want to focus on protecting downside risk. A lot of the money that we invest comes from endowments and pension funds, so it needs to be put to work in high-quality assets with low risk.
How have you changed your strategy since the start of the financial crisis?
In the 1990s we were big retail investors, but we’ve avoided the sector since 2003. At the time we thought that there would be a lot of pressure on household income – specifically in France, but probably for the rest of Europe in the future. Furthermore we thought that consumer spending would become volatile, switching from textiles to electronics and travelling, and that would put enormous pressure on retail businesses.
The reason we believed that would happen was a result of strong growth around the world. Europe would face competition from countries with cheaper labour costs, such as China and India. This would lead to slower growth in France, and an increase in state debt. A dip in government spending would also have widespread effects on the country. It looks like we were right.
Since the crisis, we have been more conservative. After 2007 we thought the economy would not return to pre-crisis levels, at least not for many years. We have stuck to resilient sectors.
Your fundraising efforts have increased from €200m to €1.05bn in your latest vehicle. This means you’ve had to work on ever larger deals. Is there more competition at this end of the market?
We have gone for larger deals, and that’s part of our aim to invest in solid businesses. There is less volatility in larger companies. Also we wanted to invest in global markets, which requires businesses to be of a certain size. That said, our sweet spot is a business with an enterprise value of between €100m and €700m – we don’t touch anything over €1bn.
It’s definitely a competitive market. And it’s difficult to raise debt. However, our competitive position has been strengthened because of our conservative strategy. Since 2003 we have avoided highly leveraged transactions in cyclical businesses. None of our portfolio companies has suffered serious liquidity problems, and we’ve only two or three covenant breaches, which were dealt with easily and rapidly. This has given us credibility with banks, and it’s why we have been able to close deals all the way through the crisis. We even managed to buy the micro-connections division of the French group FCI in August, when nothing was happening, which had €450m of debt underwritten by Nomura, Goldman Sachs and Bank of Canada.
Although we can still get deals under way there have been two very significant developments. First, the amount of debt we can get is lower – it tends to be four times Ebitda, where it once was five or six times. Second, the cost of debt has increased from 400 basis points to 550 or 570.
You managed to get two significant exits – the sale of Trescal to 3i and Geoservices to Schlumberger – before going out on the road. What advice would you give to GPs trying to raise a fund at the moment?
Exit markets come down to timing. You have to make the most of any windows of opportunity that come your way. At the start of 2011, it was still a reasonably good time to sell businesses. That changed in August. Apart from the problems in the eurozone, there has been a slowdown in the US, Brazil and China. One reason that we were able to realise investments is that we deliberately chose businesses that were resistant to the crisis.
In addition, we have a small portfolio, usually only ten companies, and we are hands-on investment managers. This old-fashioned, industrial approach to deal-making has become more fashionable and certainly more popular with LPs. GPs that are sector specialists rather than generalists are also more likely to be successful.
François Hollande has been vocal about clamping down on the financial services sector, and private equity in particular. What impact do you think it will have?
In political campaigns, a lot of things are said that remain as words and and not action. That said, entrepreneurs are deferring decisions and people are waiting to see what will happen. The new government has not helped our industry.
It is clear there will be more taxes, although what they eventually look like is hard to know at this stage. The one good thing is that the government is determined to balance the public deficit. This will create years of economic adjustment and low growth, but it should be positive in the long term. Private equity firms will have to focus on companies that generate revenues from abroad.