The French government’s initiative to set up a private equity fund with institutional investor capital to help small and medium-sized enterprises (SMEs) secure investments comes as a surprise, considering the bad press accorded to private equity in France since 2008.
The idea came in a report published in June by the French financial authority, Inspection Générale des Finances (IGF), which claimed that institutional investors are not investing enough in French SMEs.
In addition, the report argues that the current capital investment structure is only suitable for SMEs with very high growth potential, as investors have strict performance expectations when it comes to return on investment.
Managed by a subsidiary of the French public financing institution Caisse des Dépôts et Consignations (CDC), CDC Entreprises, the private equity fund would therefore help SMEs find large sources of revenue.
But, even though some pension funds welcome the initiative, with UMR Corem having already confirmed it would agree to provide €20-30m per annum to the new fund, the main problem is Solvency II.
French pension funds are cautiously optimistic that most of the measures will not be applicable to their institutions. Solvency II could also represent an interesting opportunity for pension institutions. While the Solvency I regime limits their allocation to alternative assets at 10%, the new regulation does not introduce such restrictions. These institutional investors could then have the option to increase significantly their investments in the asset class.
But the fear remains that Solvency II-type capital charge will make risk assets like private equity unaffordable.
Charles Vaquier, chief executive of UMR Corem, insists that French funds could be forced to provide as much as 65% of the capital for each private equity investment were Solvency II to be applied to pension funds.
“As a result, the new regulation could curb institutional investors’ appetite for private equity, while the capital requirements stemming from Basel III mean banks are largely unwilling to provide funds for such companies,” he says.
The same concerns arise for insurance firms. Under the Solvency II regime, some of them might be unlikely to invest in the asset class in the future due to these high capital requirements.
Michel Denizot, international activities director at AG2R La Mondiale, adds: “With Solvency II, many insurance companies have already reduced their exposure to private equity due to the costs and liquidity risk involved.”
In addition, the smaller size of France’s pension fund market compared with those of other European countries could also limit the opportunities for the new private equity vehicle to secure investments from local institutional investors.
As a result, several private equity players, as well as pension plans, such as UMR Corem, are now asking the government to help create a new pension fund vehicle and to encourage them to invest in asset classes like private equity. “It is the role of local pension funds to help the real economy to grow,” as Vaquier puts it.
Even so, the launch of a new pension vehicle in the country is unlikely to happen in the near future, due to political pressures.
“Pension funds have traditionally suffered bad press in France, as employees and trade unions still believe our objective is only to look towards the return on investment we can get,” Vaquier concedes.
The prospects for French institutional investors’ investments into the private equity asset class therefore seems limited. However, pension funds are taking some comfort from the latest news from the French ministry of finance revealing that the first pillar of Solvency II, which imposes a minimum capital requirement, would not be applicable to them. Pension schemes in France, like elsewhere in Europe, now have to hope that lobbying taking place in Brussels will encourage regulators to drop the capital requirement notion once and for all.