France's Fonds stratégique d'investissement plans to increase its regional diversification in 2011 and establish a capital investment fund in Alsace. Stuart Todd assesses these and other goals

At the end of 2008, as the global economic downturn began to bite, French president, Nicolas Sarkozy, announced the creation of a French sovereign fund, the Fonds stratégique d'investissement (FSI) or Strategic Investment Fund (SIF) - jointly-owned by the state (49%) and its investment banking arm, the Caisse des Dépôts et Consignations (CDC) 51%.

With relatively meagre resources at its disposal, when compared to the sovereign wealth funds of oil-rich states in the Persian Gulf and some countries in Asia, the FSI focuses uniquely on investments in the domestic market.

Endowed with €20bn of equity, comprising minority stakes in French firms, worth €14bn, previously held by the state, and €6bn of cash, the FSI's mission is to support the development of small and medium-sized companies, particularly those with scope for innovation and market leadership and to stabilise the capital of firms strategically important to the French economy, in terms of specific technological expertise and jobs.

Its investments span advanced materials, aeronautics, automotive components, biotechnology, contract research, oil and gas engineering, on-line video services, surgical equipment and smart cards.

Various interpretations have been put on Sarkozy's intentions in setting up the FSI: A protectionist move? A way of ensuring Gallic participation in the global SWF phenomenon? Or perhaps just simply a show of economic patriotism in hard times?

Before a gathering of French entrepreneurs, a few weeks before the creation of the FSI, Sarkozy argued that the financial crisis had ended the "market's dictatorship" and said that he would lead Europe towards a model based on increased state industrial investment.

He revealed that the FSI would "intervene significantly" should any French industries be put under threat by the crisis, underlining that the credit crunch had sparked fears that plummeting share prices could leave strategic industries exposed to takeovers by foreign investors.

Sarkozy played down accusations, particularly from Germany, that the FSI amounted to French protectionism and contravened EU market regulations.

"It's not about propping up struggling businesses, but stabilising the capital of firms with expertise in key technologies, who could become prone to predators seeking to take advantage of their temporary market undervaluation," he said.

After two years, has the FSI fulfilled its remit and what does the future hold?
Ex-ArcelorMittal executive, Jean-Yves Gilet, took the helm of the FSI, from inaugural chief, Gilles Michel, last September. Presenting the FSI's annual results in March, he said 2010 had been a "remarkable" year and its total assets had reached €21.8bn.

"The FSI is playing out its role to the full in the service of the development of companies and in identifying France's industrial projects of tomorrow."

Last year, the FSI made 21 direct investments in firms (always in the form of minority stakes) totaling €1.7bn. Two-thirds of the firms were unlisted and varied in size.
It also invested around €200m in public-private funds set up to support specific industries, such as automotive, biotech and timber and which concerned 65 firms. A further €500m was invested, in 340 firms, via 190 partner and affiliated funds.

2010 highlights included the acquisition of a stake in the ex-Péchiney activities (aluminium-making) held by mining giant, Rio Tinto and at the end of the year, the announcement that it was purchasing the 10.9% stake in STMicroelectronics held by the nuclear energy group, Areva, for almost €700m. The deal was finalised at the end of March.

"The FSI ‘family' has invested in more than 400 firms, which no other fund, public or private, has achieved until now," says Gilet. A similar level of annual investment (around €2bn) is expected in 2011.

One of Gilet's priorities in the current year is to give the FSI a greater regional footprint and in April (2011) it was one of the signatories of a draft agreement to set up a capital investment fund in Alsace.

"The FSI's performance to date has been commendable as its results show," says Thierry de la Noue, Paris-based senior investment consultant at Towers Watson. "It has built up an investment portfolio spanning many sectors and last year invested €2.4bn (€3.5bn since its creation) and posted a net income of almost €650m. Maintaining the same level of investment is a feasible objective."

He added that the FSI's arrival on France's institutional investment scene had been largely well-received and not viewed as state interference.

"What singles out the FSI is its atypical investor profile. Finding an investment fund ready to make a long-term commitment, content with a minority shareholding and with no ambition to take majority control, nor seek a swift return on capital - is extremely rare. This is not only reassuring to the firms in which the FSI has invested but also to FSI's partners in jointly-run funds and to a certain degree, to investment markets as a whole."

He argues that the FSI's ‘responsible investor' profile stands in stark contrast to one based on speculation and short-termism and could serve to fuel debate in French markets of the notion of rewarding stakeholders who make a commitment to the long term.

"Rewards for investor fidelity could well take the form of ‘trust' dividends and/or loyalty shares," he says.

AXA Private Equity has a first-hand view of the FSI in action, being a co-investor in a number of firms, including Mersen (formerly Carbone Lorraine), a specialist in advanced materials and electrical components technologies.

"We enjoy good relations (with the FSI). We are more often than not, partners or potential partners in firms' capital rather than competitors. Unlike us, the FSI is not involved in the leveraged buy-out (LBO) market," says AXA Private Equity's managing director, direct funds, Dominique Gaillard.

"The FSI has not had a disruptive influence on the investment market in any way and definitely not in the sense of driving up prices on equity deals, these already being at very high levels for the past two years and probably for the next two years to come. If the FSI was absent from what is a fiercely competitive market, we'd still have the price levels we have now," he explains.

Gaillard went on to underline that the FSI has not bowed to political pressures in its investment decisions.

"The example of two firms, each in urgent need of fresh capital, comes to mind. Considerable political weight was exerted on the FSI to invest but in the end it decided not to do so - an indication of its independence and also of the rigorous management in place, drawn from backgrounds in industry, LBO and private equity, similar to our own."

Created in the middle of a severe downturn, some commentators suggest that the FSI could be closed down when sustained economic growth returns but Towers Watson's de la Noue says this is unlikely.

"The FSI's credo is long-term support to firms and while it may well have to ‘mark time' over its investment choices in the wake the French presidential elections in May 2012. I would be surprised, even in the event of a change in the political regime, of it being dissolved, unless a direct replacement was being lined up."

Axa Private Equity's Gaillard concurs, pointing to the ‘intelligence' the FSI has shown in developing a very broad portfolio of investments and creating industry-specific funds and joint funds: "It's meeting a real need in stabilising firms' capital and there is every prospect the FSI is here to stay."