France broadens retail investor access to private equity

France’s state-backed investment bank BPI has launched an innovative fund to provide access for retail investors to private equity strategies as part of a government plan to encourage greater participation in long-term investments.

France’s push to open private equity to retail investors follows similar moves in the US and comes amid a growing debate over whether these costly and illiquid strategies offer a fair deal to investors.

Banque Publique d’Investissement has created a special purpose vehicle (SPV) that will own a 5 per cent strip of a portfolio of 145 French private equity funds that BPI invested in between 2005 and 2016. The private equity funds together own more than 1,500 unlisted small and medium sized enterprises and start-ups which are mainly based in France.

Older private equity funds that have existed for more than 10 years are sometimes described as “zombies” because their best assets have already been sold but BPI wanted to avoid cherry picking so it constructed a fund that reflected the broad range of its holdings.

Nicolas Dufourcq, BPI chief executive, says retail investors will be able to back French companies that are ‘part of its economic history and its future’ © AFP via Getty Images

Private equity funds set up after 2016 were not included as such vehicles often register losses in their early years before portfolio company investments are harvested.

Nicolas Dufourcq, BPI chief executive, said the new fund would open access to “the best management teams in the French private equity industry”. He added that retail investors would have the opportunity to back companies across France that were “part of its economic history and its future”.

BPI, which was created in 2012 by the government of François Hollande with a mandate to develop French business at home and abroad, has played a central role in delivering the financial support promised by president Macron for companies and employees affected by the coronavirus pandemic.

Retail investors can now buy shares in Bpifrance Entreprises 1, with the minimum investment of €5,000 and a maximum of €75,000. Investors will not be able to make withdrawals over the six year lifespan of the portfolio, unlike conventional mutual funds where it is possible to make daily redemptions. Institutional investors are not permitted to subscribe.

The fund’s maximum all-in annual fee has been set at 3.9 per cent and BPI will not charge additional performance fees for the new fund. The bank expects the vehicle to deliver net returns of 5-7 per cent a year. No historic data for the portfolio has been released but investors will be provided with reports twice a year for the new umbrella fund which will include anonymised returns for the 145 underlying PE funds.

Since private equity investments are illiquid, the valuation of the new fund was determined by the creation of a second identical portfolio that was sold a via an auction to two institutional investors immediately before the offering to retail investors.

The two institutional investors together paid approximately €95m to buy the matching portfolio, a double-digit discount to the estimated net asset value. This means retail investors will record an immediate paper gain on their holdings. The auction process was set up and managed by Triago, a Paris-based private equity adviser.

“This is a genuine effort to democratise private equity investment for retail investors,” said Mathieu Drean, global head of secondaries at Triago.

BPI intends to launch further iterations of the strategy if the first fund proves a success.

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