French take notice at last
Private equity is relatively undeveloped as an investment by French pension funds. Until now, the pressures against private equity have worked both against the sector itself and the investor.
Jane Welsh, senior investment consultant at Watson Wyatt says: “Opportunities to invest in private equity in France have been limited. The social environment is not particularly favourable for private investors wanting to buy a business, because they will want to take out costs by laying-off staff and selling parts of the business. This is very difficult to do in France, so it has been a very unattractive market for private equity investors.”
Welsh points out that the scarcity of funded arrangements for pensions also means that there have not been the institutional assets to invest in private equity.
“But that is all changing,” she says. “We are starting to see more flexible workplace legislation, as well as more funded arrangements for pensions. These will provide the institutional base of assets to invest in private equity. In addition, the big pan-European private equity firms have been opening offices in France. With teams on the ground, they can look at local investment opportunities, as well as market more easily to investors.”
Furthermore, there are regulations that inhibit the use of private equity in pension schemes. Investors covered by these rules include retirement institutions (caisses de retraite), which although not pension funds as such are a vehicle for retirement savings. For instance, retirement institutions within the ARRCO regime (the mandatory pay-as-you-go defined contribution scheme), which applies to most employees, may only invest in private equity through a bespoke, French-registered private equity fund, a FCPR. And any investment in an FCPR has to be approved by the ARRCO organiser.
However, insurance companies - which are also used as a medium for retirement savings - are about to see their investment regime relaxed to allow greater investment in risk-type strategies. The limit on the portion of a portfolio that can be invested in risk-type instruments, including private equity, will be doubled to 10% from 5%. And up to 1% of the total assets will be allowed to go into an individual FCPR, compared with 0.5% before.
But Dominique Dorlipo, managing director of Russell’s Paris office, does not think that the change will result in pension investors immediately investing up to the hilt. “At present, the average percentage of the portfolio invested in private equity is closer to 2-3% than 5%,” he says. “However, I reckon the percentage allocated to private equity could double over time. It is also true that within retirement institutions, we may also see some relaxation of the rules, and greater access to private equity.”
As it is, in 2003 (the last year for which figures are available), private equity investment as a whole equalled 0.274% of French GDP, according to the European Venture Capital Association. This placed France fourth in Europe behind the UK, Sweden and Finland.
But French pension fund investment in the sector plunged over the year before, down to e208.7m in 2003 from e349.6m in 2002. However, pension funds had slightly increased in importance, providing 11.4% of investment in the sector compared with 8.3% in 2002.
And government initiatives in relaxing some legislation have been reflected by the announcement that the reserve fund for state pension payments Fonds de Réserve pour les Retraités (FRR) is to set up a private equity portfolio.
In March, the fund - which invests in 12 asset classes across different markets - launched a process to select a specialist consultant in private equity. The chosen consultant will help with the tender for asset managers to be called in the autumn.
But French investors are still put off private equity by its complexity, according to Philippe Lespinard, chief investment officer, BNP Paribas Asset Management.
“Private equity is popular in the sense that a lot of people see value there compared with traditional quoted portfolios,” he says. “But there is a lot to understand, such as the complicated nature of pricing structures. There are also long lock-ups, so investors must give up liquidity for the potential of greater returns.”
However, Lespinard believes that one particular market trend will increase the use of private equity. “Continental investors are now catching up with investment techniques across the Atlantic, and many of our clients are restructuring their portfolios into a core and satellite basis,” he says. “I imagine that private equity will form a small part of the satellite.”
As part of this, there is more of a trend towards multi-manager mandates.
“Balanced management has not delivered on its promise, with asset allocations which are too rigid, and with managers who are not good at all components,” he says. “So clients are moving away from the generalist managers and more towards specialists.”
Charles Soulignac, chief executive of French private equity manager Fondinvest, says: “Our retirement institution clients will continue to invest in private equity because they understand that performance can be better than for other asset classes and because if they go via fund of funds we can select the best performer GP in the market for them.”
Fondinvest runs six fund of funds – three pan-European investing in primary businesses, and three worldwide investing in secondaries. Its funds have consistently been in the top quartile of funds measured on the EVCA basis.
Investments are mainly in leveraged buyouts and mature companies, rather than in venture.
“Some French retirement institutions use gatekeepers, but most invest via fund of funds,” says Soulignac. “Our French clients tend to use fund of funds to invest throughout Europe. However, they invest more within France than outside, because the regulations mean that it is easier for them to put this type of vehicle an_FCPR on their balance sheets than, for instance, pan-European vehicles.”