Letter number 126 of January 2020

  • NEW

News : Report on the round table discussion on "Disenchantment with stock markets and the rise of unlisted investments"

We recently organised a round table discussion with Monique Cohen, Partner of Apax Partners, Director of Safran, BNP Paribas and Hermès.

Below is a transcript of what she said (footnotes by the editors).

Vernimmen.net: Monique, you've been with Apax, which is one of the pioneers in France and Europe in private equity, for about 20 years. You're also an independent director of Hermès, BNP Paribas and Safran, and you're also a director for the investments you monitor and in which you have invested. In addition, for a long time, you were the CEO of Altamir, which was an innovative idea of the founder of Apax France who said "I want to offer, through the stock market, access to private equity to as many people as possible". For what reasons? And what is your assessment twenty years later?

Monique Cohen: Several points. Before joining private equity, I worked at Paribas on listing companies on the stock exchange. So, for fifteen years, I took care of listed companies and then for twenty years, I took care of unlisted companies.

When I was in charge of IPOs at Paribas, I systematically refused to list small companies on the stock exchange on the grounds that, somewhere along the line, they would be very disappointed once the listing was over, because as soon as the free float was very low in value, investors quickly lost interest, financial analysts no longer followed the stock and somewhere, the listing no longer made any sense.

Historically, my first dealings with Apax were based on refusals to agree to list companies they had in their portfolio. And that's what Maurice Tchenio[1] reminded me of when he hired me. And in hindsight, I was right. Indeed, all these companies listed by other banks have had not very flamboyant stock market careers, simply because they have not changed their size and have remained a little dull on the stock market, without much follow-up.

So now, to answer the question precisely. Altamir was created in the 1990s by the founder of Apax, Maurice Tchénio. And it was indeed a great idea because he was convinced that, for an individual, it was much better to approach the market of unlisted shares in a diversified manner. Especially if the structure was sufficiently transparent and tax incentives were sufficiently motivating, which was the case. If you buy Altamir shares and hold them for five years, the capital gains made by the structure aren't taxed. So, it's extremely attractive. And since at the time, Altamir was a vehicle that co-invested with the closed funds raised by Apax teams, it enabled us to invest a larger amount. We invested 500 million raised from investors in unlisted structures and 500 million which was Altamir's evergreen value. So we were managing a billion. And Altamir systematically took positions alongside those we put in our unlisted funds.

Since then the object has evolved a little, and today Altamir is a fund of funds, which is very different. But at the beginning, the concept was extremely promising and unfortunately, what happened was that it was still too small a vehicle. I tried to make it grow when I joined Apax by setting up successive market transactions, that was what I knew how to do. But in the end, it's a vehicle that's expected to be worth more than a billion. There is an illiquidity discount and a holding company discount that slightly reduces the optimal valuation of the portfolio.

Vernimmen.net: And from your experience, how do managers of small listed companies react, managers who feel abandoned, misunderstood and undervalued?

Monique Cohen: I have known company managers who've been severely impacted by the fact that, with a few trades, their share prices dropped by 40% without this being fundamentally justified by the message, the results or the strategy. Getting away from that is good, and it's extremely important.

But somehow, it's a little bit of a vicious circle. Because if the share price is too low, the stock market will not play its role since the entrepreneur won't want to raise money at a very discounted level. If the entrepreneur is convinced that the stock market isn't offering the price he/she considers the company is worth, will he/she agree to be diluted by a capital increase will be necessary for development?

And so, here I am passing on the little private equity message. At that point, we have to find the right investment fund that will agree to do a delisting because this is standard gymnastics: we list, delist and so on. And then people forget that the company was listed on the stock exchange. I spoke to a banker recently who started telling me about Coface and when I told him that I had floated Coface on the stock market in 1999, he looked at me and said: "Coface has already been listed? "Coface has been listed, delisted and re-listed. See, we have a lot of fun with this kind of thing, it keeps us busy.

But somehow, finding the right private equity fund will require the entrepreneur to accept different governance. Again, you said you didn't really want to have directors at your round table. I think that a good private equity fund, and this is blowing Apax' trumpet a bit, a good private equity fund is very useful in governance when it comes dialoguing with the manager on a strategy. It is a partner that is fully aligned with management and can help it think. Two heads are usually better than one. And that's what a good private equity fund is for, too. It's just looking into what's going on in the engine room.

Vernimmen.net: Don't we blame unlisted funds for thinking about the exit when they've only just arrived and for having a time horizon that may be different from that of the entrepreneur?

Monique Cohen: But the exit strategy, because it seems to be a bit of a scarecrow, is part and parcel of the very notion of investment funds. A fund is money that has been collected from principals to whom this money must be returned. And it's better to give them back more than they have given you so that they'll invest in your next fund. The exit horizon is normally five years. I've seen Apax support companies over seven years, ten years. There is no obligation. It's only that if you keep your investment too long, if you don't return the money, the pension funds that entrusted you with this money will be a little more reluctant to invest in your next fund, because everything's moving very fast today. Today, when you have had a portfolio company for two years, people start worrying about you by asking unacceptable questions such as "What's going wrong at the company in which you have invested?"

Vernimmen.net: There are two Monique Cohens, one who's with Apax and the independent director. Is she the same person? Is her behaviour the same? Are these the same questions you ask during board meetings and meetings with executives?

Monique Cohen: I try to be the same, not to be afflicted by a type of schizophrenia when I join the various boards of directors. In fact, the reality is that the issues are not the same. When I'm a director of a company in which my fund is an investor, and generally Apax is a majority shareholder and a key shareholder of the company. The weight of what I'm going to ask for, of what I am going to say, is totally different from the weight of what I have to say in the boardroom as an independent director at BNP Paribas, Safran, Hermès or when I was a director at JC Decaux.

I think this can't be the same way of expressing oneself, since it doesn't have the same authority, it doesn't have the same weight. On the other hand, an independent director of a listed group has an extremely important responsibility because he or she is responsible, of course, for the quality of the financial information that is transmitted, for his or her approach to risks and for the reliability of the processes that are conducted in the company. However, he or she is also there to represent a counterweight to operational staff. This is what makes good governance.

I think that a board of directors of a large group must have directors who are able to ask the right questions to management, that is, to go and see what is happening in the engine room, or at least to show their intention to understand what is happening in the engine room, as I do at the companies in which I'm an investor. If this doesn't happen, it's an open invitation to improper behaviour, as we've unfortunately seen at some major French groups. So, we must remain able to ask the right questions. This means working, reading the files and remaining relevant in your understanding of what's happening, without confusing operational roles with the role of the director.

Vernimmen.net: Monique, do you believe in the future of publicly traded investment funds that invest in SMEs? If SMEs no longer go public, do you see this developing?

Monique Cohen: I see so much growth that we have just launched a fund called Comitium at Apax, which has received AMF approval. It will therefore be a management structure totally independent of Apax, with specific approval once again. We've hired two managers and the objective of this project is to raise a fund whose purpose will be to acquire, say, benchmark holdings of between 10% and 20% in mid-cap companies that are listed, devalued or at least undervalued by the market today. The two managers will work in the four sectors that are the areas of expertise of Apax and its partners and that are specialists in these sectors. They'll work with managers and when the time comes, the latter will eventually be directors of the companies in which we've invested. The idea is to provide these companies, which will remain listed and which are once again medium-sized companies, with the know-how of unlisted companies in in a listed environment. We have succeeded, I think, in companies like Altran, GFI and Albioma.

And our intention is no longer to do so with our current funds, because our clients don't appreciate the mark to market at all, it's not yet mark to planet[2], but just plain old mark to market. And that's my verdict, the mark to market is far too volatile for people who invest in private equity. So, when we made an incursion into the world of listings without succeeding in delisting companies, we found ourselves stuck by the mark to market of these positions, whereas we were very aware of the work we were doing at the companies and which was not reflected in the value that the market gave. So that's why we preferred to have a very specific project independent of our other funds. And this project is Comitium. As you can see, my answer is yes.

Vernimmen.net: I have another question for you, I don't know if the answer will be yes. My fellow researchers at HEC always tell me: "Pascal, beware of investment funds, when they list companies on the stock exchange, it's because they haven't found other solutions and they never leave any money on the table". Not leaving money on the table means listing the company at the highest possible level of its value, and precisely on the first day of listing, it does not go up much and it goes down instead. Is that your feeling?

Monique Cohen: What you have to understand is that knowledge of listed markets in the unlisted sector is very limited, I think. As a partner of a major fund in Paris, I must be the only one with the stock market background that I have, fifteen years in a listing environment, twenty years in a non-listed environment. I don't think there are any other examples, apart from André François-Poncet, who also had a good understanding of the markets at BC and now at Wendel. I think there are very, very few of us with this expertise. So, there is very strong mistrust on the part of the unlisted sector of listing professionals. And why this mistrust? First, through a misunderstanding of the mechanisms. And then, especially when we choose to go public in order to exit, we will not be able to sell 100% of our company. There is no prohibition, but it is not possible. Practically, the maximum you can offer to the market is 50% of the shares you hold. And so, you find yourself selling 50% a priori on good terms, otherwise you wouldn't have agreed to do so, because the window was opened at an opportune moment and you were happy the valuations. But you'll still be left with 50% which will suffer the mark to market. And that's very painful. So, contrary to what we think, going public for an investment fund is really a decision that's made because there are other constraints. Sometimes it's even what the manager wants as it results in raising the company's profile. It is rarely the fund's first choice.

Question from a participant in the room: There's a situation on private equity today that may cause you some concern. It has been a very profitable asset class, but the consequence is that it tends to pre-empt the stock market a little. We've seen this in the United States, where over the past twenty years the number of listed companies has been halved, from around 8,000 to around 4,000, and we see some of the same mechanisms arriving in Europe with private equity taking up a little too much space.

Monique Cohen: Pre-empting IPOs. Just as I indicated that the exit for us, the stock market alternative, is always an alternative, we'll try to have a parallel process to sell to an industrial player or another fund if it has a story to tell after us.

Yes, private equity will always seek to be an alternative, and we at Apax, insofar as we have this sectoral approach, are very regularly upstream on subjects where the shareholder, the manager will look at what working with Apax means and what going public means. So yes, you're absolutely right about that.

Question from a participant in the room: Serge Weinberg recently recalled that he found that the prices paid by private equity may be too high. Is that your opinion too?

Monique Cohen: I read carefully what Serge Weinberg wrote. He pointed out that the context is highly correlated with current interest rates. It's true that with rates that are now considered to be permanently low, the valuation of real assets is rising enormously. We all have this conviction in private equity that we're acquiring much more expensive assets than we would like. It is much more satisfying for us to buy an asset below 10 times EBITDA than today between 15 and 18, as is the case for some quality assets with a good level of growth.

Now, since there is a lot of money flowing into the asset class, always for the same reason (search for yield), we have to deploy the money entrusted to us and therefore what we're trying to do to remain realistic is to "choose our battles". In other words, really decide on what issues we'll fight to acquire the asset, because we know that it will be very expensive. Then, we need to be honest when we do our simulations of exit projections. Not the way bankers show us, bankers keep saying: "we pay a high price but we exit at a high price, so at this little game, we win every time". So, what we do for our investment committees is to say: I'm choosing this fight, I'll pay a very high entry multiple, because the context is what it is, there is a lot of money and few assets of very good quality. But, I'll do exit simulations at five, six, seven years with significant drops in multiples. We spend a lot of time looking at historical multiples, looking at the periods when the multiples were lowest. And it's only when we have done this work and are convinced that we'll still offer our principals a sufficient return after five years, even if instead of leaving at 15 times EBITDA, we leave at 11. Only then will we decide to speed up the process. But the context is what it is. Once again, we have to deploy the money.

Question from a participant in the room: What is your ESG approach? Is it different from approaches of listed companies and how do you integrate this into your investments?

Monique Cohen: The ESG theme, I am absolutely convinced, is a theme that will become more and more important and it will go very, very quickly because, for the moment, it is still a bit of a tick the box, but it will become essential. At Apax, we've had a methodical ESG approach for seven years. We signed the PRIs[3] very early on, and we have an ESG manager in the management company who first made a diagnosis of the management company itself, our carbon expenses, see how many trees we needed to plant to compensate, etc. (they are essentially related to the trips we make and that we have our various consultants make). So, we've done a lot of work on ourselves. He then led the implementation of an ESG roadmap in each of the companies in our portfolio. This is extremely important, because we report quarterly to our investors on the figures achieved. We have a whole paragraph on how the roadmap presented to them is being implemented. We consider that what's not actually measured is difficult to follow. So, for each company, we try, as soon as the roadmap is implemented, to have very precise data that are monitored, depending on the nature of these data, on a quarterly, half-yearly or annual basis. We show our investors the actual impact in terms of EBITDA surplus created in companies. It is extremely well followed by our principals and I think that when we did it, we were pioneers. We also have trophies from some of our investors (wooden trophies that we keep). Today, I think that it has completely reversed itself as a dynamic, that is, we are no longer congratulated. We are told that if you do not have an ESG policy for your management company and ESG strategies in the companies in which you invest, you are not entrusted with money. So the logic is totally different. It's no longer a 'nice to have', it's a 'must have'.

In my universe, I think it's moving much faster than in the listed universe, that is, we're talking about very, very large investors, Apax essentially raises its money outside France, we raise our money from Canadian pension funds, American pension funds, large Asian or Middle Eastern public funds. And American or Canadian pension funds are extremely strict on this. If what you explain to them is not credible, you can spend two hours on a conference call to justify a company's ESG roadmap.

Question from a participant in the room: I would like to know your position on employee share ownership. Because we talked about a lot of things, but we didn't talk about those who were in contact with the business, and therefore the employees. How do you approach these stakeholders in the context of your developments?

Monique Cohen: For unlisted companies, you all know that there is a very strong alignment of interests between the fund investor and the managers, which is done through the package put in place, which is essentially based on a surplus value given to managers as soon as the BP is exceeded. Therefore, it is a sharing of the goodwill above the business plan that was the subject of the fund's investment case.

What we do very systematically is to talk to the manager. He or she is the one who decides how this package will be allocated. For us, it's an extremely important message because it's a management tool for the team and we've seen everything: we have the manager who keeps 80% of the package for him/herself, the manager who keeps only 10% of the package and who divides 90% very evenly among the other managers. And then beyond that, we're trying, and I mean trying, to systematically set up a dedicated FCPE[4] and the fund contributes to this FCPE. The problem that this creates is that the companies in which we invest are very often, not only French companies, and don't only have employees authorised to subscribe to this type of instrument, but have employees all over the world. And so, this creates an imbalance. I remember a facility management company I had acquired, the manager, who was really an exceptional manager, who had kept less than 10% of the package for himself and divided the rest among his managers, absolutely wanted to set up a scheme to incentivise employees that was very far reaching, since we had agreed to contribute to the fund in question. And then it didn't go ahead because the company had managers in Belgium and Germany, managers in the UK, and providing a benefit that only concerned employees in France, but couldn't be offered internationally could create a problem at the company.


[1] The founder of Apax France and the co-founder of Apax.

[2] Reference to the previous round table, the transcription of which appeared in the Vernimmen.com Newsletter of December 2019, n° 125.

[3] Principles for Responsible Investment.

[4]  Company mutual fund: an investment fund reserved for employee shareholders.


Statistics : Typology of venture capital fund exits

This comparison of two graphs produced by KPMG[1] on the history of venture capital outflows worldwide speaks volumes.

It should already be noted that neither of the two graphs mentions the exit from the investment as a result of liquidation or bankruptcy. However, in the field of venture capital investment, at least in the early stages, this is the most frequent type of exit, since after ten years between 70 and 80% of the companies created have disappeared[2].

In terms of number, the sale to a competitor is by far the most frequent exit method (euphemistically called a strategic sale):

And LBOs have increased over time, not surprisingly, since the starting point, 2010, follows the near halt in 2009.

In value terms, IPO is the clear frontrunner.

We might well think that if the former start-up, now a company, has succeeded brilliantly where most of them fail, its management will be able to impose its choice. An initial public offering still gives managers more freedom than an LBO or a sale to a competitor. Not to mention the mega-successes for which buyers may be rare at a time when the question of an initial public offering is raised for reasons of size or anti-trust (Alibaba, Uber, Critéo, etc.).


[1] Venture Pulse Q4 2018, KPMG Enterprise 2019.


Research : The effect of mergers on competitors, customers and suppliers

With Simon Gueguen, lecturer-researcher at the University of Cergy-Pontoise

When two companies in the same sector and on the same level of the value chain merge, this will have at least some knock-on effects on competitors, customers and suppliers. On the one hand, the market power of the merged companies and sector concentration of increase. Past studies have shown that this effect is mainly positive for competitors.[1] This result is explained by greater collusion, or, to put it another way, the easing off of the price war in the sector. On the other hand, improving the operational efficiency of merged companies indirectly affects competitors, customers and suppliers. The article we present this month[2] provides an assessment of these two effects

The consequences of a merger are multiple and isolating the effects of increased operational efficiency is not easy. Bernile and Lyandres came up with the idea of estimating operational gains based on the forecasts communicated by management at the time of the announcement of the merger. They collected information published in the press for a sample of 480 mergers announced (in the US market) between 1996 and 2005. They then calculated the present value (in dollars) of the operational gains announced by the managers, in order to obtain an indicator that could be used for the entire sample. Their study shows that, overall, these voluntary announcements constitute an acceptable forecast of effective operational performance within three years of the merger.

The effect of greater operational efficiency is in theory negative for competitors, since competitors are subject to greater competition. The study confirms this: one standard deviation of announced gains corresponds to a 2.6% fall in the market value of competitors. This result goes against the effect linked to greater collusion.

For customers, the effect predicted by the theory is positive, because the merged company, which has become more efficient, will be able to offer lower prices. Remember that the effect of operational efficiency studied here is deliberately isolated from the effect of market power, which in turn leads to higher prices. The result is in line with theoretical expectations: one standard deviation of announced gains corresponds to a 1.1% increase in the market value of client companies.

Finally, for suppliers, the net effect is more difficult to predict. On the one hand, a more efficient merged company should produce and sell more, which could lead to more orders from suppliers and so this would result in a positive effect. On the other hand, greater efficiency can also translate into higher productivity and lower orders. The net effect on the stock market value of suppliers is largely positive, 2.7% for one standard deviation. Note that the stronger effect for suppliers than for customers is related to the sample structure (suppliers are smaller than customers, so their relative value is more affected by the same announcement).

The method is original, and the effects measured significant. It is of course possible to criticise the use of voluntary disclosure by management as a reliable indicator of operational gains. For example, one might imagine that, in some cases, over optimistic forecasts of operational gains are used to conceal value-destroying operations from the market. However, as Bernile and Lyandres note, this should result in the opposite effects of those observed (increase in the value of competitors, decrease in that of customers and suppliers). The results measured in the study are therefore all the more significant.


[1] E.ECKBO (1983), « Horizontal mergers, collusion, and stockholder wealth », Journal of Financial Economics, vol.11, p. 241-273.

[2] G.BERNILE et E.LYANDRES (2019), « The effects of horizontal merger operating efficiencies on rivals, customers, and suppliers », Review of Finance, vol.23(1), p. 117-160.


Q&A : What is a Term Loan B?

A Term Loan B ("TLB") is a senior long-term loan (generally for between 5 and 7 years) taken out by institutional investors in the context of highly leveraged transactions (often, but not only, LBOs). TLBs are not, or are very rarely, amortising loans but bullet loans.

The term Term Loan B comes from the LBO world where historically senior debt was structured as a 5-year amortising Tranche A (Term Loan A), a 6- or 7-year Tranche B (Term Loan B) or even a longer-term Tranche C[1]. TLBs have become independent loans and are now set up alone, without tranche A or C. In addition, they are now mainly subscribed by hedge funds or specialised funds (issuers of collaterised loan obligations, CLOs).

TLBs are used in the same circumstances as high-yield bond issues. They therefore compete with (depending on price and flexibility in particular) or are a complement to high yield bonds (to maximise liquidity, as the type of investor is different). TLBs are traded between investors, even though they are not listed on a formal market.


[1] For further details, see chapter 46 of the Vernimmen.

New : Comments posted on Facebook

Regularly on the Vernimmen.com Facebook page[1] we publish comments on financial news that we deem to be of interest.

The impact of ESG criteria on share prices

Echoing the round table that we organised a few weeks ago ("Does it pay financially to be virtuous in ESG?", the report of which appears in the November 2019 issue of the vernimmen.com newsletter), Bank of America has estimated the loss in value borne by 24 S&P 500 groups that have revealed an ESG problem over the last five years: accounting scandals, sexual harassment, data theft, etc. at $534 billion. That is to say $22 billion per company in the 12 months following the disclosure of the problem.

The study shows that while some investors buy these stocks after they have fallen sharply, investors who follow ESG principles boycott them for periods that can exceed 5 years.

Don’t say you weren’t told!