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G. du Halgouët & T. Robet (Chateaudun Credit): “Private equity funds consider factoring for their portfolio companies"
The co-founders and owners of Chateaudun Credit, the French leader in factoring brokerage, talk to us about the usefulness of factoring in the current period and its role in the context of M&A.
Tell us a bit about Chateaudun Credit.
Thibaut Robet. Today, Chateaudun Credit is the number one factoring brokerage specialist in Europe. We help French companies and international groups setting up the most efficient accounts receivables financing solution possible. Our service includes the evaluation of the financing potential and the management of the project, from the tender to the initial financing. This includes negotiating the contract’s terms and conditions, managing the customer risk management (credit insurance), team training and IT implementation.
The factoring market recorded a significant decline in 2020. How do you explain it?
Gaëtan du Halgouët: According to the EUF, in 2020 the European factoring market contracted by 5.4%. The biggest declines were in the UK (-12%), Italy (-10.8%), Spain (-7.6%), France (-7.5%) and Portugal (-6.9%). Only few countries experienced growth: Germany with 1.3%, the Netherlands with 1.4% and Poland with 3%.
There are two very simple explanations for the decline in the factoring market. First, many companies stopped their activity during the first lockdown and have still not returned to their pre-Covid-19 activity level. The decrease in turnover of factored companies has had a direct impact on the volumes purchased and financed by factoring companies. The second explanation, which is true in several European countries, is the massive distribution of assistance provided by government support schemes. These subsidies, whose repayment has not yet begun, largely cover the cash flow needs of many companies that would otherwise use factoring.
How did Chateaudun Credit experience 2020?
Thibaut Robet. While our domestic activity suffered a sharp slowdown, our business with large international companies enabled us to get through and maintain a 10%-growth. In 2020, our team set up 700 million euros in new financing lines. We also invested in the development of new modules in our factoring software, designed to facilitate the monitoring of customer risk and credit limits. We worked to improve our visibility and simplify our communication by redesigning our websites.
Factoring is a tool for financing working capital needs, why is it of interest to investment funds?
Gaëtan du Halgouët. First and foremost, factoring is the financing tool with the best ratio of cost to funded amounts. It allows companies to benefit from the largest possible amount of financing at a very low price. Companies usually have confirmed lines of credit (revolving credit facility) to meet any cash flow requirements. This line of credit is limited in amount and is always accompanied by a clause - or covenant - that requires early repayment in the event of difficulties. In this case, the factoring programme remains operational as it is based on the company’s accounts receivables and the quality of the client portfolio.
Moreover, when it is off-balance sheet treated, it does not affect the debt. It therefore allows the company to increase its cash flow significantly while improving the presentation of its financial statements. More and more private equity funds want their portfolio companies to leverage their receivables through factoring. It is often set up, among other things, to finance external growth, participate in the refinancing of the company, and facilitate the payment of dividends.
What are the profiles of investment funds using this method of financing?
Thibaut Robet. We work a lot with national or international private equity funds involved in their portfolio companies. Special situation funds, particularly turnaround funds, use factoring almost systematically to secure the cash flow of their portfolio companies.
When do private equity funds consider factoring for their portfolio companies?
Gaëtan du Halgouët. Factoring can be considered at any time. We have noticed that this is usually considered prior to the acquisition with the objective to start in the weeks following the closing. We have sometimes negotiated it just after the signing for financing on the closing day.
How are you preparing for the much-awaited economic recovery?
Thibaut Robet. The government schemes will come to an end and the companies will start repaying these debts and yet they would still need to finance their growth. 2022 must be prepared now and companies may consider factoring as a solution to finance this growth.
At Chateaudun Credit, we are anticipating it by welcoming new team members. Eight recruitments are underway to increase our IT and consulting teams. At the same time, we are working on the launch of a new version of our factoring and credit insurance software.
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