France: LP returns for the masses?

France's retail funds industry plays a significant role in the country's venture and growth capital scene, with the long-established FCPI and FIP vehicles allowing individuals to finance businesses at the early stages of their development. But in many cases, the FCPI/FIP model attracts investors due to the tax rebates offered on commitments, rather than the actual returns generated.

Fondations Capital has obviously chosen to come at this market from a different angle. At the beginning of September, the Paris-based GP set up a new, independent manager dubbed Fondations Capital Privé, which in turn started marketing the FCPR Fondations Capital Privé PME (FCP PME) vehicle. The fund's premise is somewhat unusual. Typical French FCPR vehicles mainly target institutional investors while also being open to high-net-worth individuals and family offices, while FCP PME will exclusively focus on retail investors. But the GP is pitching an investment strategy far removed from that of FCPI/FIP funds. The vehicle will take minority positions as a co-investor in buyout and build-up transactions alongside "vanilla" private equity firms.

Fondations Capital Privé claims the strategy will allow it to deliver a level of gross performance on par with funds open only to institutional investors. Knowing that more than 70% of all FCPIs and FIPs raised since 1997 have posted negative returns, according to a recent study by French investment advice website bienprevoir.fr, FCP PME certainly stands out. This focus on performance, and the minimum commitment of €20,000 compared with a typical €1,000 for retail funds, points to an altogether more sophisticated clientele than that of traditional tax-optimisation vehicles.

FCP PME is aiming to ultimately raise €30m. The vehicle will have a seven-year lifetime (with two potential one-year extensions) – which will undoubtedly make the proposition more attractive to high-net-worth individuals compared with private equity's traditional 10+1+1 years. The investment period will run for approximately three years, after which any proceeds will be reinvested before the divestment phase kicks in, six years into the life of the fund. Total annual fees (remunerating both the manager and the intermediaries marketing the fund) will amount to 3.76%, while carried interest has been set at 20%.

Investments-wise, FCP PME will also differ significantly from the remit of most FCPI and FIP funds. The vehicle will co-invest in transactions targeting French and European businesses that have been established for more than five years, with revenues in excess of €15m and displaying recurring cashflows. It will focus on buyouts where private equity investors hold on to a majority of the company's shares and will let the majority owner pilot the value creation and exit processes.

Smidcap empire
The launch of FCP PME is a further step in Fondations Capital's diversification strategy. The GP, which was established in 2007, has only been managing a single fund under its own banner – the €300m Fondations Capital I vehicle, with five portfolio companies. But the firm acquired fellow French manager LBO Partners from CM-CIC Capital Finance a year ago, adding €200m in assets under management via two funds to its stable.

The establishment of Fondations Capital Privé will now see the GP trying to tap into the more sophisticated end of the retail space, which makes sense given the significant contribution of non-institutional investors to private equity fundraising in France. Last year, high-net-worth individuals and family offices were the third-largest investor group in French vehicles, behind insurers and public entities, but ahead of pension funds and funds-of-funds, according to data from trade body Afic.

In terms of investment strategy, Fondations Capital will also have the small- and mid-cap segments fairly well covered. The original Fondations Capital fund invests €20-50m in businesses valued at more than €200m. Last year's addition, LBO Partners, targets companies with enterprise values of less than €200m, investing equity tickets in the €5-40m range. The most recent addition to the family, FCP PME, meanwhile, will focus on the smaller end of the market with investments in the region of €2-5m.

The first closing of FCP PME, forecast for the end of the year, will be an early indicator of whether Fondations Capital's latest, rather left-field move – enabling Joe Public to access the transactions and return levels that were hitherto the preserve of institutional investors – will pay off for the GP.

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