France’s drive to open up private equity to retail investors follows similar movements in the United States and is part of a growing debate about whether these costly and illiquid strategies offer a fair solution to investors.
The Public Investment Bank has created a SPV which will hold a 5% tranche of a portfolio of 145 French private equity funds in which BPI invested between 2005 and 2016. The private equity funds together hold more than 1,500 non quoted. small and medium-sized businesses and start-ups mainly based in France.
Older private equity funds that have been around 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” and therefore built a fund reflecting the wide range of its holdings.
Private equity funds created after 2016 were not included as these vehicles often experience losses in their early years before the investments of the holding companies are harvested.
Nicolas Dufourcq, CEO of BPI, said the new fund would open access to “the best management teams in the French private equity sector”. He added that private investors would have the opportunity to support companies across France that “are 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 in France and abroad, has played a central role in providing the financial support promised by President Macron to companies and to employees affected by the coronavirus pandemic.
Individual investors can now buy Bpifrance Entreprises 1 shares, with a minimum investment of € 5,000 and a maximum of € 75,000. Investors will not be able to make withdrawals over the six-year life of the portfolio, unlike conventional mutual funds where daily redemptions can be made. Institutional investors are not allowed to subscribe.
The maximum annual flat fee for the fund has been set at 3.9% and BPI will not charge an additional performance fee for the new fund. The bank expects the vehicle to generate net returns of 5-7% per year. No historical data for the portfolio has been released, but investors will receive reports twice a year for the new umbrella fund which will include anonymous returns for the 145 underlying PE funds.
As private equity investments are illiquid, the valuation of the new fund was determined by the creation of a second identical portfolio which was sold by auction to two institutional investors just before the offer to retail investors.
The two institutional investors together paid around 95 million euros to purchase the corresponding portfolio, a double-digit discount to the estimated net asset value. This means that retail investors will see an immediate paper gain on their holdings. The auction process was set up and managed by Triago, a Paris-based private equity advisor.
“This is a real effort to democratize private equity investing for retail investors,” said Mathieu Drean, Global Head of Secondary at Triago.
BPI intends to launch further iterations of the strategy if the first fund proves successful.