French retail funds: is the model still viable?

France's FCPI and FIP* retail vehicles routinely face criticism surrounding fees and performance, and managers have also had to face declining collectes (yearly fundraises) in recent years as the pool of investors shrinks. According to statistics from private equity trade body AFIC, only €628m was raised by FCPIs and FIPs in 2012, down from the record €1.13bn raised in 2008 - although it must be noted that 2013 was a step in the right direction with a 9% increase on the 2012 haul to €683m.

According to Roland Dennert, a managing partner at direct secondaries investor Cipio Partners, the fund model is in danger of stagnating if regulation isn't brought in to shift the emphasis for FCPI managers from fees to capital gains. "The FCPI business in France is for most managers more about making money on fees rather than on capital gains and, in this sense, is not what private equity really is about at all," says Dennert. "If France wants to save this FCPI fund model, they need to make it a model that's about profit, not just about fees."

He goes as far as to suggest the weight of fees can lead managers to hold onto assets for much longer than necessary in some cases: "In its current state the FCPI industry is no longer able to provide sufficient capital for the global ambitions of strong companies and at the same time it is not driving weak companies to an exit. FCPIs don't have enough money to invest in the growth of their best companies and the focus on fees rather than capital gains ends up being a disincentive to sell weaker businesses."

"In the current consolidation trend, there is a question of what to do with the portfolios of some smaller funds, so I believe that there is a direct secondaries market for smaller FCPI managers" - Isabelle De Cremoux, Seventure Partners

Dennert points out a possible exit strategy for these funds is the direct secondaries market: "That could be changed by direct transactions where a new disciplined buyer comes in at a price where they have a chance to create value and a chance to make exits happen."

Fighting the retail corner
While the development of a direct secondaries market for FCPIs could open up interesting avenues, does France's retail funds model really need fixing that badly? XAnge Private Equity's Xavier Girre points out that changes are already being made in the industry: "There has been some criticism about FCPIs, but improvements on regulation are already being done. For example, it's now necessary to invest 70% of the fund in innovative companies, not the previous 60%. The investment period is also being increased to ease pressure."

Alexia Perouse, life sciences partner and co-head of the venture capital team at Omnes Capital, which manages FCPIs sold to individual clients of the Crédit Agricole Group networks, also comes to the model's rescue on one of its sorest points: "Fees are shared between the bank and the management company. As the size of FCPIs remains relatively small, this is not a scalable business like FCPRs [funds raised from institutional investors], which again puts pressure to show results and increase the collecte. And last but not least, the management team has a carried interest as any classical VC fund and is thus interested in the performance as well."

Furthermore, Seventure Partners - which has been raising FCPIs since they were created in 1997 - has also raised two institutional funds. "If the FCPI model was purely about fees, why would we have bothered to raise institutional funds?" says CEO Isabelle De Cremoux.

"Since 1997 there have been good and bad cycles from a venture capital perspective," she adds. "If there had been no FCPIs, I really think that overall, the start-up industry would have been in big trouble."

Overcrowded
Most market players will however agree that the industry is still plagued by an ongoing issue: the sheer number of FCPI managers now operating in France. "Only 17% of all FCPIs make any profit at all, but the managers of the other 83% don't disappear," says Dennert. "The amount raised by these funds is declining but the managers don't disappear - they get smaller and poorer, so the funds are getting smaller and in turn the management fees are obviously getting smaller," he says. "So what you have today is a fragmented industry structure where there are too many players and nobody has enough money for a serious funding round in a serious project, so essentially it is doomed by default."

However, De Cremoux believes this is another area of the industry currently being tackled: "Many FCPI managers are currently being purchased by fund managers. Thanks to this consolidation situation, the industry is normalising and beginning to have the benefits without the drawbacks.

"There are several profiles of FCPI managers," she adds. "There are the managers that have critical mass and are growing, but there also smaller funds that cannot raise much and therefore cannot afford to hire more staff to grow. In any segment you have good and bad players, but that's the same in classic LP funds."

The development of a direct secondaries market for FCPIs, as called for by Dennert, could also be a potential solution to the issue of over-fragmentation, as De Cremoux points out: "In the current consolidation trend, there is a question of what to do with the portfolios of some smaller funds, so I believe that there is a direct secondaries market for smaller FCPI managers."

* FCPIs (Fonds commun de placement dans l'innovation) are French retail vehicles, which invest in innovative French SMEs, and award their investors with tax benefits. FIPs (Fonds d'investissements de proximité) operate on the same principle but target regional businesses.

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