June 6, 2019

Private equity: how Excubation reinforces the Equity Story

Philippe Besnard
Managing Partner

French private equity is celebrating its most successful year since the 2008 financial crisis (1) with nearly €19 billion in funds raised and €9 billion in divestments for the 2,200 companies involved. This performance reflects a high degree of confidence in the future and in the capacity of the companies to generate the value expected by investors, in other words, to deliver a more attractive “Equity Story”.

Understanding the levers of growth

How do companies which benefit from the private equity ecosystem overall intend to create value quickly and durably at a time when the digital tidal wave is making competitive positions as fickle as gains can be lucrative when the right choices are made? It can be helpful to compare France Invest’s data with that of an earlier study (2) which states, notably, that value creation (3) in the selection of SMEs and ISEs analyzed comes 59% from a “income effect” and 38% from a “multiplier effect’.

The extent of the income effect, i.e. most frequently an increase in EBITDA resulting from a change in offerings and addressable geographies, is not surprising. However, the strength of the multiplier effect, which totals two-thirds of the income effect, is very instructive. It is, of course, the result of an abundance of liquidity in the market and of the competition between investors. However, it is likely that the multiplier effect is also the result of the interpretation made of the company’s business activity and the way in which this reading is applied to the future rather than to the past.

Therefore, a company’s intent on ensuring the digital transformation of its offerings, its distribution channels and its internal operations (frequently under the pressure of its investors/shareholders) will need time for its initiatives to turn into an operating surplus. However, it is likely that its valuation multiples will begin to increase more rapidly. This is the multiplier effect at work. The statement “Past performance is no guarantee of future results” is well known, but the value of the asset itself depends on a vision of the future.

The Equity Story isn’t Equity History. It is written in the future tense.

It is, in fact, the future ratio which will, ultimately, determine the goodwill granted to a company, the quality of the exit for the investors or, simply, the potential for refinancing under better conditions.

Whilst it is established that the work of the company’s heads and boards of directors consists in preparing the future while making the best of the present, it is clear that companies are increasingly torn between day-to-day operational performance and their desire to take advantage of the pervasive digital revolution which is providing as many opportunities as it is perils.

No one can deny the daily conflict between incremental growth, which is sometimes synonymous with stagnation, and the launch of new, disruptive innovations which carry a high risk of shifting to the detriment of historical business activities which make a real contribution.

It is in this context that the growing interest of private equity investors, and of the companies they support, for this type of growth opportunity subcontracting, called Excubation, has become apparent to us.

Improving the Equity Story with excubation

What is excubation about? A company and its shareholders entrust a third-party firm with the development of a radically new business activity, usually with high digital content, from scratch. The new business has its own legal personality and is planned for its reintegration in the parent company when pre-agreed KPIs have been achieved. The excubation partner is a co-investor in the new venture, and withdraws at the time the zero to one (4) is implemented, which maximizes the alignment of interests.

This approach is used to deploy new, purely digital DNVB-type brands, for the launch of new products and services sold directly to consumers or simply to operate a peripheral, high-growth business in order to avoid any side effects on the core activity. This type of approach is radically different from that of startup studios which have the benefit of converting their customers to agile methods, but do not take on the same long-term operational leadership role, or the same financial risk.

By enabling new pages of company growth to be written more quickly, more precisely and more flexibly, excubation makes the Equity Story of companies more real, more tangible and, in the end, more desirable. They can approach their next financing rounds under much better conditions while equity capital investors enjoy the dual benefit of a multiplier effect and a results effect.


1 – France Invest study, Activité des acteurs français du capital investissement, March 28, 2019.

2 – Value creation in French SMEs and ISEs whose transformation is backed by French equity capital.

3 – Value creation is defined here as the change in the value of the company’s equity between the date control is transferred and the date on which it is disposed of in full.

4 – Zero to One: Reference to Peter Thiel’s book published in 2015.

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