Experts' Opinion: Value Sharing and Private Equity deals, a new landscape
News : transaction services
Value sharing is taking a new turn with the law transposing the National Interprofessional Agreement (ANI), notably expanding the number of companies concerned. These virtuous mechanisms, however, have many implications for companies that private equity funds accompanying them must anticipate. Experts' opinion by Fabrice Huglin and Hervé Teran, partners at Nexia S&A.
In France, only 20% of companies with fewer than 50 employees offer value-sharing mechanisms, compared to 89% of those with more than 1,000 employees. The law of November 29, 2023, aims to generalize this phenomenon in very small enterprises and small and medium-sized enterprises. Starting from January 1, 2025, companies with 11 to 49 employees with a net profit of at least 1% of their turnover for three consecutive years will have to implement at least one value-sharing mechanism, such as profit-sharing, incentive schemes, value-sharing bonuses, or employee share ownership. This scope would affect an additional 1.5 million employees, according to estimates by the French Asset Management Association.
The new legislation continues the momentum of the 2019 PACTE law, as well as measures taken during the health crisis, such as the Macron bonus, to try to preserve the purchasing power of the French. More generally, this body of texts, accompanied by social and fiscal incentives, invites companies to involve employees more in the performance and capital of their companies. Implicitly, it aims to promote social, societal, and environmental responsibility issues. When a company makes profits, employees have contributed on their scale. The idea is that the company’s wealth should trickle down to employees through some form of value sharing.
A virtuous sharing for both employees and companies
In 2021, for 2020, €18.6 billion were distributed in France through value-sharing mechanisms, representing a significant average additional remuneration of €2,440 for employees in companies with at least ten employees. During a round-table discussion with private equity sector players, we identified several benefits of value sharing. Associating employees with performance generally boosts the company’s growth, as well as its competitiveness. Employee loyalty grows. They become more engaged and motivated as their work is increasingly rewarded and recognized. The importance of the topic is therefore twofold for funds, not only because they can apply it internally and thus enhance their ESG policy, but also because it influences their portfolio companies and the operations they can carry out with them.
Direct consequences on financial elements
Private equity funds must anticipate the ins and outs of the value-sharing law since it has direct consequences on a company’s valuation and payroll. During the investment period, funds seek to develop and support the activity of the accompanied company through identified growth strategies (organic or external). Operations that, in the long run, aim to have a positive influence on its value. If funds invest in companies that were initially ineligible but become so tomorrow, the result will mathematically decrease at first. The sector must therefore take a position on the matter to anticipate and quantify it. However, if the situation changes during the investment period, it will be to the detriment of the fund from a purely financial perspective.
Anticipation is again essential, especially in the case of an LBO setup. In an LBO context, the operating company distributes dividends to the holding company so that it can repay the loans it has taken out. With the implementation of profit-sharing in such a context, the operating company’s equity will be significantly impacted. In its legal form, employee profit-sharing will be significant and generally permanent. However, the legislative framework provides for derogatory formulas. Fiscal and social benefits vary according to the type of mechanism. While there is great flexibility in the form that profit-sharing can take from one company to another, the application of profit-sharing will be the same for all. It is a more known and standardized mechanism. In terms of tax integration, the free allocation of shares is a major component that, if poorly evaluated, can compromise the validity of an LBO operation. Nexia S&A thus offers forecast calculations so that funds can estimate and anticipate costs.
By complying with standards whose application is imminent, private equity funds will have to seek to optimize their financial performance and exploit the opportunities created. The importance of due diligence should be reinforced, as well as the transparency of operations in the non-listed sector.