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An American PE in Paris

by David Carey | Published February 17, 2012 at 12:00 PM

When American private equity firms showed up in Paris in the late '90s, the aliens, with their proverbial financial wiles, were met with suspicion from the locals. "When we started here in 1997, we were called 'vulture' funds," recalls Sébastien Bazin, European CEO for Colony Capital LLC: "Then, from 2004 to 2007, a lot of people were angry at private equity and LBOs because of the wealth creation for so few." Rumors swirled that Carlyle Group's bureau was a front for the C.I.A.

While popular distrust still lingers, it has lessened. For Carlyle and Colony, gaining entrée to the French business establishment has been easier than winning over the public, thanks to their assiduous efforts to blend in.

Washington-based Carlyle and Colony, a real estate-oriented group based in Los Angeles, were the first U.S. PE players to establish outposts in the City of Light, Carlyle arriving in 1996 and Colony the year following. Carlyle's inaugural European deal was French, the 1998 purchase of Groupe Genoyer, a maker of piping equipment, and about 40% of the nearly €7 billion ($9.3 billion) it has invested in European buyouts has been in France. (Carlyle has a separate European real estate operation, headquartered in Paris.) Colony has put $14 billion to work in Europe, 60% in France, Bazin says.

Staffing up with French nationals, he says, has been vital to success in France. Many of their deals have been sourced by French-speaking partners with local connections.

"Almost everyone in this office is French," says Carlyle managing director Benoît Colas, one of three Carlyle managing directors in Paris. The entire professional staff numbers a dozen. "We've done a lot of deals in partnership with French families. If we didn't have a French-speaking team and a local presence, we could not have done them." The latest example: Carlyle buying a stake in boiler maker Giannoni SA France from the company's founder. "The founder doesn't speak English; he lives five hours away from Paris. That's not a deal you could do out of London."

Bazin, 50, a Sorbonne-schooled native Parisian who spent eight years in the U.S. working in planning and strategy for Kaiser Aluminum Corp. and in M&A at PaineWebber, has family roots in French real estate management dating back four generations. "It's a very clubby business," he says of the French PE world. "Either you belong or you don't belong. Because of the size of Colony, our education, our nationality and our network, Colony after 14 years is now a part of the club."

Bazin is one of the club's most recognizable members, thanks to three high-profile deals: Colony's 2008 acquisition of Paris Saint-Germain FC, one of France's best-known soccer franchises; its 2005 purchase of a minority stake in French hotel operator Accor SA, which it later sold down before reinvesting in it in tandem with French investment concern Eurazeo SA; and a joint purchase in 2007 with luxury-goods magnate Bernard Arnault of a 13.5% stake, later boosted to 16%, in French retailer Carrefour SA.

Accor, of which Colony and Eurazeo own just under 30%, is one of the biggest hoteliers in the world. Carrefour is the world's second-largest retailer after Wal-Mart Stores Inc. Both are mainstays of France's flagship CAC 40 stock index.

Bazin says the investments and its representation on boards of both companies has "played a very long way in [establishing] Colony's visibility and credibility in the French market." He adds, "That's had a lot of side benefits."

One benefit that has eluded Colony in Carrefour is scoring a profit. The firm sank €1.5 billion into the retailer, much of it when the stock was at €45. A drop in profits and market share has driven the shares down to around €18.

From the start, Bazin and Arnault have thrown their weight around. They were involved in firing Carrefour's head of French operations, James McCann, last spring and a move last month to replace CEO Lars Olofsson, whom they'd had a hand in hiring. Last year a plan they'd hatched to bolster the share price by selling 15% or more of Carrefour's valuable real estate holdings in an initial public offering was shelved after it drew fire from trade unions, other stockholders and some Carrefour executives who argued it would dismantle Carrefour. Such asset spinouts are common in the U.S. but rare in France.

Bazin won't say if the spinout is dead or merely on hold, But the move seems an obvious way for Carrefour to win recognition from investors for a property portfolio that analysts say might be worth €15 billion. That is well above Carrefour's market capitalization.

Carrefour's problems, Bazin opines, are "fixable."

One area where private equity players in France have to tread lightly is in streamlining and cutting jobs at companies they own. In contrast to the U.S., job reductions are hard to effect in France, where politicians of the left and the right champion workers' rights. Even companies on death's door cannot unilaterally opt to cut workers. To do so, a company must first justify the move in writing to the government. Drawn-out negotiations with bureaucrats and workers' committees ensue. Politicians may seek to block the cuts. And workers who are let go continue to receive most of their former salaries for at least two years.

"France is probably the most difficult country in that respect," says an executive of a U.S. private equity shop. "It wouldn't look good for an American private equity firm to slash jobs in France. If you want to be here for the long term, you don't do that."

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