The democratization of private equity funds

Source : Boursorama

What is private equity?

Private equity is the acquisition of a stake in the capital of a company. Depending on the strategy adopted, this process can be used to finance a company's creation (innovation capital), development (expansion capital), sale (transfer capital) or turnaround (turnaround capital). To this end, the investor provides equity capital.

For a long time, access to private equity (investment in unlisted companies) was limited for individuals, especially the wealthy, to FIPs (Fonds d'Investissement de Proximité) or FCPIs (Fonds Communs de Placement dans l'Innovation), whose tax treatment is particularly attractive. Increasingly, however, this asset class is being democratized and found at the heart of life insurance and very long-term savings contracts. Involving unlisted companies, this asset diversification opportunity protects investors from stock market fluctuations.

FIP and FCPI, from tax exemption to active management

Given the risks and capital requirements of investing in small and medium-sized enterprises (SMEs), successive governments have always sought to encourage individuals to invest in these assets through tax incentives. For a long time, these incentives mainly concerned FIP and FCPI funds.

Subscribing to FCPI or FIP units entitles the investor to a reduction in income tax (IR), provided he or she undertakes to keep the units for a minimum period of five years. The reduction amounts to 25%, until December 31, 2021 (extended to 2022 pending approval from the European Commission), of the sums invested, up to a limit of 12,000 euros for each product category (FIP and FCPI) for a single person, doubling for a couple within the same tax household , and within the overall tax niches ceiling of 10,000 euros per year.

Private equity performance

Depending on risk levels, private equity returns range from 7% to 8% per annum, and up to 15%. According to the 2021 study by France Invest (an association of investors for growth, comprising 7,000 private equity professionals and experts) and EY (a worldwide organization of Ernst & Young Global Limited member companies), by the end of 2020, the overall performance of French private equity, measured over a 15-year horizon, is 11.7% p.a. on average, net of fees and carried interest (percentage of a fund's capital gains deducted and reverting to the fund's management team). Innovation capital is on the rise, with a performance of 13.6% over the past three years. As for development capital and buyout capital, performances over ten years are 6.1% and 13.4%.

Contributions of the Pacte Act

At a time when returns in euro funds were falling, insurance companies were forced to make new asset classes available to individuals. As a result, since January 1, 2020 (the date on which the Pacte Act of May 22, 2019 came into force), the scope of investment vehicles eligible for life insurance within the framework of units of account has been opened up to professional private equity funds or even Eltifs or Feilt funds (these very long-term European funds invested notably in private equity projects focusing on infrastructure).

Unit-linked assets eligible for life insurance vary according to the investor's skills and/or the amount of the premium previously invested. This option has also been made available to investors considered professional or well-informed. Similarly, the new Plan d'Epargne Retraite (PER) created by the Pacte law can be invested in a wide variety of vehicles, such as club deals and private equity. Once again, a way of democratizing this type of investment.

Instruments for the long term

Private equity is particularly well suited to long-term asset management. In exchange for a relatively high return, these investments must be made over a long period of time in order to develop their full potential - a minimum of five to ten years, depending on the strategy chosen.

Informed investors measure their risk

The democratization of private equity and the possibility for anyone to invest in unlisted companies represent real opportunities for savers. While these investments can reduce overall volatility because they are not listed on a market, they always involve a degree of risk. Investors should familiarize themselves with the provisions contained in the DICI (Document d'Information Clé pour l'Investisseur - Key Investor Information Document), which specify in particular the lock-up period for funds, the conditions for benefiting from tax incentives, and a warning about the specific risks associated with investing in unlisted companies.