LBOs in France: Why do some fail?

By Hugo Daugeron – Mijoin, from Finetudes

In this blog entry, our society has the pleasure to publish an interesting study by Hugo Daugeron-Mijoin, an analyst from Finetudes, a think-tank LUIFS partners with.

At the end of this post, you will find the link to the full article if you want to go through it in detail after reading the abstract.

The Leveraged BuyOut (LBO) is an operation which consists in the acquisition of the securities of a target company by an ad hoc structure, (created specifically for the operation therefore without own activity) and which subscribes a debt to finance this acquisition. To better understand the mechanism of an LBO you can click here or there (both sources in French) .

In 2018, there were 384 LBO transactions in France. This represents only 17.31% of companies supported in French Private Equity (PE) but 65.00% in value, or more than 9.5 billion euros invested.

Leverage capital is a very heterogeneous sector, where each operation is unique because of its sector, its shareholders, its business model or factors specific to the company. It is therefore very difficult to want to identify a trend in order to understand what makes an LBO work or fail.

We will call a failure of an LBO according to the following definition: a failure of an LBO is characterized by at least one of the factors including i) the financial default of the company ii) the obligation to refinance its financial debts in order not be in financial default iii) the breach of a covenant iv) the loss for a Financial Sponsor on his initial investment v) the departure of top management prematurely. This definition of “failure” is key: performing an LBO is a complex operation for all players. It is therefore necessary to be precise and all the points mentioned above are synonymous with non-compliance with the information which had initially enabled this operation to be carried out. Failure is not only the failure of the company which will certainly be a failure of an LBO for all the actors but all the points mentioned can also affect at least one of the actors and put it in a situation of failure .

Starting from a current observation on LBOs and the evolution of their financial structuring, we will study the governance of the company with the Financial Sponsors in the capital in order to see if they have a negative impact. Next, we will see how the size of the company can be a determining factor in the success of the LBO.

Link to the full article:

https://15ad8933-de71-49e8-a20d-8c107093f629.filesusr.com/ugd/f00acc_303c333ecc2c4678a07f002a5c1a4385.pdf?index=true