Vol 9 (2012) - Issue 2

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De Facto Management, Mismanagement and Possible Sanctions Incurred by Financial Investors in the Context of Unsuccessful LBO Transactions in France

In a 'perfect scenario', exit for a profitable target company/ group acquired by a private equity fund by way of a leveraged buyout ('LBO') transaction is usually through:
– flotation on a publicly listed market;
– sale of Newco set-up to facilitate acquisition of target by a trade purchaser; or
– secondary or further buyout.

Should the acquired target be unprofitable, exit tends to be by one of the following methods:
– winding-up Newco through insolvency proceedings;
– sale of the private equity fund’s shareholdings to the management team, often for a low price; or
– capitalisation of a portion of the claims owed to creditors and/or the transfer of equity capital to the senior or mezzanine lenders for a nominal value who will then proceed to sell the business or the shares at a later date after the restructuring of the company.

On 7 December 2011, Moody’s released a report including its study of 40 large, bubble-era leveraged buyouts. For many of the LBOs featured in the report, Moody’s highlight weak revenue growth, soft earnings performance, a high default rate and stable to declining ratings. Private equity investors await better conditions for an exit.
One might think that, as in 2009 and 2010, LBO activity in France is likely to be affected if, as some anticipate, the economy deteriorates in 2012. On the one hand, some expect buyout activity in 2012 to resume at a more regular rhythm and be characterised by an increase in public-to-private transactions and secondary buyouts. On the other hand, one might presume (and there are strong indicators) that there will be several LBO/debt restructurings prior to contemplating a possible exit and/or the disposal of underperforming entities within groups of companies held in portfolio by FCPRs ('fonds communs de placement à risques').
Considering the current economic climate in most European countries and particularly in France, private equity firms may encounter many difficulties in 2012 in setting up LBO transactions with acceptable financial conditions or, in some cases, to comply with covenants contained within the initial financing arrangements. During this upcoming year private equity investors may also face other difficulties with respect to possible claims against them in their questionable position as co-employer or de facto director in the context of insolvency proceedings. Indeed, with the temptation to bring claims against the wealthiest, shareholders with deep pockets are more likely be targeted when companies succumb to insolvency proceedings.