Interview with Emmanuel Régniez, Head of Investment Banking France, Citi
M&A REVIEW EUROPE: What are the current trends in the Private Equity market today?
Emmanuel Régniez: In 2020 (this year to date), the market has been extremely active. Now in October, the market has already reached or even exceeded the levels achieved over the whole year of 2019. There are a lot of pre-emptions or assets negotiated early on, either in bilateral deals or with a restricted circle of buyers. The Covid pandemic has affected several companies. As a result, owners of these companies have been forced to delay any potential exit in the short term. The market is now focussed on assets which have performed well during the crisis, and which have become even more attractive. We should bear in mind that in recent years, fund raising by financial sponsors has become much faster, with much larger amounts of capital raised, and this has also resulted in a focus on certain specific sectors, in particular, technology and healthcare. At present, many asset owners and managers do not necessarily want to organise large-scale public auctions because the current situation remains very volatile.
Since interest rates have been very low for a number of years, now many companies refinanced themselves just before the crisis, often with new portable debt packages, which made it possible to have information readily available in the market and allow buyers to focus on the equity alone.
In addition, many transactions are acquisitions from one investment fund to another and, as a result, are well known in the market. As a result, another important market trend is the very high number of deals between funds.
Some funds consider that, because of the Covid crisis, the time is not ideal for investing in new sectors. However, if an asset has a defensive value and has already performed well, the owners can use the mechanism of a “continuation fund” or bring in a minority shareholder to monetize part of the equity. The SPACs (Special Purpose Acquisition Companies) are another interesting phenomenon. We recently listed on the US Stock Exchange a SPAC sponsored by the Belgian investment company GBL (Groupe Bruxelles Lambert) and the family office of Nassef Sawiris, the NNS Group, raising 600 million dollars. Avanti Acquisition Corp. is the first major SPAC to focus on acquisitions in Europe, where company valuations are traditionally lower than those in the US. This SPAC will target European companies with a value between 1.5 and 2.5 billion euros, with ambitious development goals in the United States, preferably family-owned companies, because this is the DNA of both NNS Group and GBL. This is largely an American market and Citi is a leader in this product. “Strategic” deals are also back. For example, we recently sold Ardian the green resin and ingredients company DRT, to Swiss perfume and flavour company Firmenich for 1.7 billion euros, which wanted to integrate vertically upstream.
The M&A market has picked up and strategic buyers are once again keen to consolidate and strengthen their portfolios. In more recent deals completed by funds, Ardian has just announced a major operation in the United States: the acquisition of 50% in Angus Chemical, for more than 2 billion dollars.
One of Ardian’s goals is to grow in the United States. Most of the major French Private Equity investors – such as PAI, Eurazeo, Antin IP or Ardian – are actively seeking to continue to grow outside France, in particular by opening local offices, including in the United States. In addition, the IPO market, which was also put on hold by the Covid crisis, has recovered in Europe very strongly. There will probably be a new wave of IPOs coming soon. In some sectors, the stock market has returned to its pre-Covid levels.
To sum up, we are operating in a very active market, with solid valuations for quality assets. We have already seen many transactions that were in the pipeline for this year being completed, were in the pipeline for this year being completed.
M&A REVIEW EUROPE: Is it true that some assets are valued higher today than before the crisis?
Emmanuel Régniez: To date, the crisis has not had a negative impact on the prices of assets which can trade. The level of intensity of Mergers & Acquisitions activity and pre-emption, and the aggressive approach to successfully acquire companies is probably even higher than before the crisis. In my opinion, the funds cannot afford not to invest for the duration of the Covid crisis. They have all raised a lot of capital and need to deploy. They are therefore focussing on the few companies which have demonstrated their resilience to the crisis. This crisis has also highlighted the strategic value of sectors such as technology, IT, and healthcare.
M&A REVIEW EUROPE: How do you explain the boom in Private Equity?
Emmanuel Régniez: This is a phenomenon that we saw during the 2008 financial crash. In order to generate greater returns than zero, capital tends to be invested mainly in alternative funds (including Private Equity, infrastructure funds, hedge funds, credit funds etc.).
Many of the funds (pension funds, asset managers, etc.) will make big investments into Private Equity because they can offer 12 to 15% or more above the returns of government bonds. This has been one of the main reasons for the Private Equity boom between the crisis of 2008 and 2019. Investors with significant available funds will usually seek quality assets which have good cash flows and good management teams, well positioned in their sector, in short, all the typical features of a good candidate for a leveraged buyout (LBO). It is therefore likely that there will be an inflation of the value of certain assets which become even more attractive. In addition, in a period of uncertainty, smaller non-state related investors, individuals and companies, will tend to reduce their spending and investments. A large part of the funds of the Central Banks will be temporarily trapped in the financial markets until they can be used to stimulate the economy later. Part of these funds will no doubt be invested in Alternative Management, in particular in Private Equity. In my view, the Private Equity investors will continue to be very active in the market. In this situation, certain specific sectors will be in great demand, to a disproportionate extent.
M&A REVIEW EUROPE: In what ways is this crisis different from that of 2008-2009?
Emmanuel Régniez: This crisis is different in its globality and in the way it affects every part of society. It did not start in the world of Finance. Certain sectors are severely affected by this crisis and with lasting consequences.
A number of transactions have been put on hold because of Covid. That said, the partial recovery we observed in the period when the lockdown was eased showed how quickly things could return to normal. This could result in transactions with motivated buyers taking a more long-term view beyond the current economic cycle. Notably, KKR has been particularly active in France.
M&A REVIEW EUROPE: In the Private Equity transactions that you are currently carrying out, what are the trends in terms of their size?
Emmanuel Régniez: As in the past, we remain focused on transactions of a minimum size.
It is often the same assets which are changing hands. These assets have increased in value and are now selling at several times their previous value, which explains the increase in transaction size
Strategic buyers are also prepared to pay premium prices, especially when these buyers also benefit from high valuation and/or benefit from a potential for synergies
M&A REVIEW EUROPE: What is the added value which the Citi team can offer in this very specific context?
Emmanuel Régniez: We have a team dedicated to the French market with proven expertise and execution capabilities on the ground in Paris. We put forward the global nature of our set up (products and the sectors and countries). We remain the world’s most global bank thanks to our historical presence in the largest number of countries. As a result, we have extensive knowledge of the strategic buyers, whatever their country. We are also able to find different forms of capital, including very specific niche markets (e.g. family offices). We can offer our clients integrated M&A advisory and Financing capabilities, and sometimes also financing buyers, who are selling businesses, as was the case in the acquisition of DRT by Firmenich. In dual track processes, we also offer our clients with both M&A and IPO options. In triple track operations (with a SPAC Special Purpose Acquisition Company or a continuation fund), our experience also serves us well.
M&A REVIEW EUROPE: As a result of the crisis, will manufacturers carry out more sell-offs and acquisitions?
Emmanuel Régniez: This crisis is forcing major industrial companies to review their portfolios even more and focus on their core businesses which will lead to asset disposals. Since we are operating in a low growth world, acquisitions will also be essential to continue to deliver growth to shareholders. To summarise, investment funds expect, on the one hand, to obtain attractive deals from corporates and, on the other hand, buybacks of the assets they hold by strategic buyers.
In addition, France has a large number of small and medium-sized companies which need to grow, and this also offers good prospects for M&A in the years ahead. Some start-ups will also grow to become targets, or even become potential future buyers themselves
M&A REVIEW EUROPE: Has the time it takes to complete operations increased?
Emmanuel Régniez: Since there are more and more preemptions, deals can be completed faster. But as a general rule, the time taken for the regulators, especially the anti-trust authorities, to approve Mergers & Acquisitions has increased.
M&A REVIEW EUROPE: What difference does it make that you cannot now do all your business face-to-face with your customers?
Emmanuel Régniez: This favours buyers based in France or with teams dedicated to the French market and with a strong historical presence in France. An investment fund which does not know the market in Paris well and which has few local connections has very little chance to succeed. Today, we are fortunate to see several assets coming to market which are already well known: second, third or fourth leveraged buyouts, for example. When a given asset has an history of being bought and sold in the market, it is much easier for an investment committee to make a decision and offer a winning price to trigger the negotiations and complete the deal.
M&A REVIEW EUROPE: In the years to come, will Private Equity operations be able to remain at the same level as in 2020?
Emmanuel Régniez: Every year, investment funds raise even larger amounts of capital, new companies are taken over in LBO’s, companies previously taken over in LBO’s grow and their shareholders change. I don’t think deal activity will slow down. Of course, there will be a number of IPOs and buybacks by strategic buyers. But a large number of companies previously taken over in leveraged buyouts will opt for new one’s. The number of potential candidates is rather increasing. Managers today more often than not tend to favour a new LBO rather than an IPO when they have the choice. The key factor is the availability of credit and at present we can again have debt packages allowing support to attractive valuations
M&A REVIEW EUROPE: The healthcare and technology sectors are the big winners in this Covid-19 crisis. Will this situation last?
Emmanuel Régniez: Before the Covid crisis, buyers were already focused on certain sectors, including Healthcare, Technology, certain Business sub segments or Specialist Chemicals. While it is sometimes difficult to value these companies accurately because we do not always know if their increased level of activity is only temporary and linked to Covid and is sustainable, we still anticipate a strong demand for these sectors in the years ahead.