FUSIONS & ACQUISITIONS MAGAZINE – JANUARY-FEBRUARY 2020
In the last summer edition of Fusions & Acquisition Magazine, Caroline Mathieu, the General Manager of FBN France reminded us that ‘responsible commitment is at the heart of family-owned business strategies’. « Family-owned businesses make up two thirds of companies worldwide, employ 60% of the active population, and account for 70% of total GDP. » So their shareholders weigh in pretty heavily when it comes to the world economy.
We think that the family shareholders of the greatest French and European companies have a historic role to play over the next 5 years, which goes beyond responsible commitment within their own companies and extends to massive scale investment in our industrial start-ups and SMEs. If they don’t act, there is a risk that Europe’s industrial decline will become irreversible.
For the sake of argument, we will take the example of the hydrogen sector, and the role these families can / must play in financing companies within this sector, as it presents a truly unique opportunity for value and job creation, that would also limit Europe’s dependency on fossil fuels. But this is just one example. The same logic applies for all industrial breakthrough innovations.
Indeed, an illuminating double observation can be made in Europe. On the one hand there are ever increasing numbers of family-owned businesses, large group subsidiaries, or companies which are majority owned by private equity funds, which are being bought out by North American, Chinese, or Russian firms, either because they are ahead of the pack and leading their markets, or because they are losing speed and offer market access to buyers who can shift all (or part) of the production process abroad. On the other hand, the amounts that are being invested in industrial innovation are still strikingly insufficient, especially in the ecological and energy transition sectors. According to a study carried out by France Invest and the Grant Thornton cabinet, 14.7 Billion € were invested in 2200 non-listed French companies in 2018, and according to the Cleantech Group’s figures, 168 million euros were invested in seed level and series A French cleantech start-ups with and industrial or hardware component, in other words, 1,1%. That’s just one hundred and sixty eight million to invest in technologies which are utterly necessary for our companies to tackle the ecological and energy transition; just one hundred and sixty eight million to finance companies which are supposed to one day be competitive on an international playing field. Do we seriously believe that this level of funding is sufficient to support the emergence of new industrial champions?
Of the numerous explanations behind this structural under-investment, let us examine the three key reasons : 1) the very high returns seen by LBO funds over the last 15 years, teamed notably, with lower interest rates, has made them increasingly attractive to institutional investors and large private funds, 2) the prudential ratios for Solvency 2 imposed on insurance companies has dissuaded them from investing in venture capital – it’s too complicated, and too « costly in terms of capital »- ; 3) the very low profitability of venture capital funds, largely due to a shortage of invested capital, issues with access to public procurement, and economic policies which tend mainly to favour large groups.
So how do we build new industries with a few million euros, when our competitors are pumping in tens of billions of dollars? China, for example, has injected 55 billion dollars of subsidies and grants into its battery sector over the last 10 years, thus spawning 2 giants, CATL n°1 worldwide and BYD n°3, and in 2018 alone, it put up 13 billion for the hydrogen sector. If we do not invest massively in these sectors now, our transport industrialists, vehicle manufacturers for heavy goods vehicles, buses, cars, our energy groups, and our local authorities… will soon be forced to purchase Chinese fuel cells, Chinese electrolysers, Chinese buses and Chinese sub-assemblies… with Chinese financing!
Do France and the European states have the means to fight and invest massively in these new industries? The answer is probably yes, but are they ready to give themselves the means? Are they ready to switch a small part of their savings over to venture-capital and change the rules of the game so that institutional investors can be exonerated, at least in part, from the prudential ratio calculations normally applied to venture capital investments? Nothing could be less certain. Up until now, Europe has proven to be incapable of protecting itself from globalisation effectively, and incapable of having a powerful strategy, or a long term industrial strategy.
France now has roughly seventy companies in its hydrogen portfolio (large companies, mid-caps and start-ups), and they do have the potential to foster international champions to rival our Chinese competitors. However, they will need tens of billions of euros over the next 10 years to be successful. The coming 2 or 3 years will be decisive in stopping the Asians from getting the upper hand in this very promising industrial sector. For the record, a report from the International Energy Agency recognised that hydrogen gas would be key to a successful energy transition, particularly when it comes to decarbonising industrial and transport sectors (IEA, The Future of Hydrogen, and June 2019).
In France we are also equipped with large public research laboratories which are at the cutting edge of hydrogen, providing more than half of all European publications on the topic. The missing link is private capital, as the predominant French and European financing systems only tend to kick in when asked to complete or top up private funds. So without private investment, there is no public co-investment and very few subsidies or grants available.
Given all of this, we think that wealthy French and European families have a historical role to play in the financing of our industrial start-ups, mid-caps, and SMEs whether they are French, or European. If this doesn’t happen quickly, these companies will die out or be bought out one after the other by North American, Chinese or Russian actors, with higher capital, and above all, a much better support system from their own countries in the battle against international competition. If we let this opportunity to create a European sector for hydrogen to pass us by, not only will we not get another chance, but it could spark a chain reaction across all European industries, and shareholder families will be the first victims.