France looks towards legislative changes for FCPIs

Following three years of lobbying on the part of the French venture capital community, AFIC, headed up by its new chairperson Hélène Ploix, has entered into talks with the Trésor et Direction de la Legislation Fiscale and with the Commission des Opérations de Bourse (COB) to discuss the changes which may finally be made in the loi des finances for 2002 concerning FCPIs (Fonds Commun de Placement pour l’Innovation). While it is widely accepted that FCPIs have been a successful way of making venture capital accessible to the public, the complicated regulations surrounding the structure have been frequently criticised by fund managers.

Currently, FCPIs are raised from individuals and public funds and are specifically designed to finance the development of small- to medium-sized French companies, as defined by the French industrial development agency, ANVAR. ANVAR will grant companies ‘innovative’ status for a period of three years, once certain criteria are fulfilled. The business must either successfully prove the innovative nature of its products and justify its need for financial backing, or must have spent an amount on research over a three year period that is equivalent to one third of turnover in the most successful of those three years. Created by the loi des finances of 1997, FCPIs must invest 60% of the total funds managed in unquoted companies and must never invest more than 15% of this total in any one single company.The difficulty with this, according to many fund managers, is that this ratio does not merely apply at the outset for the fund, but throughout its life (a minimum or five years) and throughout the liquidation period. As such, FCPIs are considered difficult to manage, due, in particular, to continually fluctuating portfolio valuations. In addition, should the FCPI find itself holding a stake higher than 15% in one business, it would be forced to sell a portion of its share, whether conditions were favourable or not, so that occasionally the fund manager is forced to act in a way which is not necessarily in the best interests of investors. Finally, there have also been calls for the strict criteria that must be met by investee companies to be relaxed slightly, to offer more opportunity for investment.

Yet there are currently 19 different groups within France which manage FCPIs, including AGF Private Equity, Avenir Finance Gestion, AXA Private Equity, Spef, CDC IXIS Private Equity, Crédit Lyonnais, Société Générale and Siparex, suggesting a certain level of popularity for the vehicle. Indeed, some industry commentators insist that the strict regulations should remain in place, since FCPIs take a certain risk with public funds. However, any changes would certainly boost the image of AFIC, which has been accused in the past of doing little in the way of lobbying for legislative change in favour of the industry. The simplification of the structure of any French investment vehicle may also attract a greater number of foreign institutions to the area, which would boost the industry as a whole. For example, fairly minor changes to the FCPR structure would make it almost identical in nature to a limited partnership, a far more familiar structure for UK and German institutions.

Whether any changes are made to FCPIs remains to be seen, and it is not yet known what returns will be made by the first batch of FCPIs that were launched back in 1997. But following the announcement recently of new guidelines for venture capital management companies operating in France and calls for tax and legal obstacles to the completion of public-to-private transactions in France to be removed, it is clear that France is starting to address the regulatory issues which at times hinder the development of a more dynamic French private equity market.

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• Topics
• France
• Industrials