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Standard & Poor’s: The French mid-market

Standard & Poor’s: The French mid-market

France’s mid-market is resisting tough economic conditions. But with approximately €650 to €690bn to raise by 2020, and banking disintermediation set to continue in the long term, Standard & Poor’s Claire Mauduit-Le Clercq and Alexandra Krief explain how mid-sized companies in France are seeking to attract alternative means of funding. This presents opportunities for investors to expand and diversify their portfolios.

Last year was a challenging one for the French economy. Economic forecasts show that France is lagging behind an already slow European recovery with GDP expected to have grown by only 0.4 per cent in 2014. This compares with our forecast of 0.8 per cent growth for the eurozone as a whole, and 1.4 per cent and 3.1 per cent growth for Germany and the UK respectively. Yet, despite the gloomy outlook, French mid-market companies – the backbone of the economy – have proved resistant. Prudent balance sheet management, diverse international reach and involvement in niche markets mean our French mid-market panel on average looks stable.

This display of resilience means that there is a keen desire from mid-market companies to fund growth–for example, we expect France’s mid-market as a whole will need to raise between €650bn and €690bn by 2020. Yet, with banking disintermediation set to continue for the foreseeable future, mid-market companies have to seek complementary sources of funding – with the private placement sector proving particularly popular. That said, greater transparency around credit quality is required to ensure potential investors have sufficient financial information to make advised investment decisions.

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Competitive advantages increase resilience

Significant competitive advantages mean the mid-market is surviving amid rough economic conditions. This is because mid-sized companies that are able to provide certain expertise gained from involvement in niche areas, which is not as readily available in other sectors, can mitigate competition and assure relatively stable and higher profitability. In addition, regional diversity also remains a distinguishing characteristic of French mid-size companies, with 57 per cent in our sample operating on more than one continent. Therefore, by adopting this international focus, smaller companies can counterbalance exposure to challenging economic conditions and increase growth potential.

Prudent balance sheet management has also helped to ensure that the French mid-market remains resilient. Despite having suffered from pressured profit margins since 2007, French mid-size corporates have in general exhibited a more conservative financial profile than larger corporate competitors in Europe, especially with respect to their equity levels and their cash buffer.

Indeed, our research shows that French mid-size corporates display a high percentage of equity to total assets – stabilising at 40 per cent in 2013 – in comparison to their German and UK peers. They have also managed to maintain a high level of cash and short-term investments to total assets at about 10 per cent, above the European average of about 8 per cent. Adopting this cautious approach helps mid-sized companies in France lessen the effects of declining profitability in a less favourable economic environment.

Looking for alternative funding sources

Research suggests that France’s mid-market will need to raise up to about €690 billion of debt within the next five years – mainly to honour their existing financing commitments. However, the general trend over the past six years indicates that banking disintermediation in France will hold for the longer term, as shown in Chart 1.