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Cooling down: buyout activity in the French market slows as players adjust to harsher market conditions.

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The French winter holidays this February and March were a welcome break for private equity players in Paris, their bankers and lawyers because in the previous few years the market was so hot that many of them had to cancel their trips to Europe's ski slopes and the toastier climes of the DOM-TOM.

In today's market, however, the large LBO space has shut down just as it has in every other market leaving large LBO houses with very little to do unless they are prepared to consider deals in the already strongly populated mid-market in France or to follow the example of US LBO houses and diversify into other investment areas such as real estate and infrastructure.

The next couple of years for the mid-market in France look set to mirror other markets like the UK where bank debt is scarce yet still available for select deals, mezzanine is making a big comeback and private equity houses are replete with funds that they really do need to invest.

"We're not really seeing any large deals anymore and until the banking market mess is sorted out the large LBO deals are just not getting done. Banks in France still remain skittish. Deals in the heated French market up to mid-2007 were structured with very few covenants and with financing that could only be paid back on a sale," says George Pinkham, senior partner at SJ Berwin in Paris.

Some deals were structured that permitted target companies to defer payment of interest until the end of the loan which is viewed as unwise because many companies might be unable to pay both the principal and the accrued interest when the loans mature. There is a sentiment that only time will tell if some of these companies default when they are required to pay the accrued interest.

"In the lower end of the mid-cap market deals are still getting done. At the high end of the mid-cap market there may be no deals for some sponsors," says Pinkham. "I think it will be a mediocre year, but it is too soon to say if it will be a disastrous...

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