I
t’s been a hot, lazy summer in most of France (far superior to last year, weather-wise, thank goodness).
But in at least one sector of France people struggled to completely relax: the private equity / venture capital firms whose principal sources of funds are tax-incentivized “retail” investors. Such retail fund vehicles are a fairly uniquely French concept. Unlike conventional VC firms in Silicon Valley, for example, whose funding sources are institutional limited partners (“LP”s) like pension funds, insurance companies, endowments, and other corporations, retail funds come solely from a broad base of “unsophisticated” French taxpayers who receive a generous tax credit in return for their risk-taking.
The private equity players that manage such retail vehicles have enjoyed over 10 years of a gravy train that produces a somewhat predictable annual envelope of investment funds – sourced from a collection of non-discerning investors that are more concerned about their tax break than fund IRR – along with a very predictable annuity in the form of management fees over an 8~10 year commitment.
Now however, indications abound that this cash cow may be finally drying up.
Did the music just stop playing?
In 2011, receipts from retail funds fell off a cliff, plunging 42% to 588 M€ from 838 M€ in 2010. Moreover, the past year has witnessed a tendency for distributors of such vehicles (e.g. retail banks, tax advisors) to increasingly push individual mandates over fund vehicles to their networks. Last but not least, all bets are off regarding how the new administration of President François Hollande, with an “anti-rich” campaign posture and facing monumental fiscal challenges, will view the tax loopholes of retail FCPI, FIP, and ISF-related funds.
One example of a “retail VC firm” sitting on the front lines of this shift is A Plus Finance (recently featured in Les Echos). The case of A Plus is symbolic given the firm’s core strategy from its 1998 inception on developing a distribution network to raise such retail funds. Their single-minded focus propelled A Plus to be among the top retail fundraisers each year, for example raising over 70 M€ in tax-incentivized FCPI and FIP vehicles in 2011.
But now, in a sharp strategic pivot, A Plus has begun targeting institutional LPs for its new investment vehicles, starting with its A Plus Yield Capital mezzanine fund, and perhaps later even a pure VC fund, LP-backed in the classic sense.
As far as retail GPs go, A Plus boasts a relatively long track record, and may well succeed in raising its new LP funds. However, demand for institutional LP investment in the French private equity asset class far outstrips supply.
Over the past 12 months, at least 40 French private equity firms tried raising funds from institutional LPs, either overtly in the form of formal fundraising road shows, or more quietly behind the scenes. So far, only 8 of the 40 firms have succeeded, as pointed out by Jean-Christel Trabarel, founder of placement agent Jasmin Capital.
Part of the problem is that such fundraising initiatives, particularly those sub-100M€ targets, do not appeal to LPs outside of France. The new banking regulations of Solvency II and Bâle III place further burden on institutions when investing in the asset class.
Track record? Moi?
But there is an elephant in the room that is not lost on Trabarel, and that is that unlike retail investors, institutional LPs are laser-focused on fund performance. Most retail VCs simply lack the track records, coherent investment strategies, compensation structures, and human talent to garner interest from the sophisticated LPs.
It’s going to be an interesting year ahead for this group.