The birth of the French pension fund?

The Macron Act (named after the current French minister for the economy) was welcomed very favourably by the local private equity community and the business world in general when it was promulgated early last year. Macron's second sweeping reforms package was unveiled in November and included one measure in particular that could have benefited French private equity: the creation of a new pension funds regime designed to finance both listed and private businesses.

Although the second Macron Act was ultimately shelved by the ever-more unpopular government, the idea of fostering the emergence of a proper pension funds framework in France could get a new lease of life – it is believed the first steps of this particular measure will be debated in the ministers' council at the end of March.

In their current form, pension funds in France could not be further removed from their equivalent in countries such as the UK. France remains firmly attached to a system whereby workers are directly financing the pensions of their elders, in a process managed by the state, as opposed to progressively contributing to their own future pension.

Technically, pension funds do exist in several industries, allowing individuals to supplement their state pension once they retire. But these schemes are usually run by insurers, are heavily regulated (notably under Solvency II) and therefore cannot meaningfully invest in equities, instead leaning strongly towards government bonds and other "safe" investments.

Savings are plentiful in France, but unfortunately they are not sufficiently channelled towards investments in unlisted businesses" – Louis Godron

The French government's aim is to redirect this pool of capital – which currently amounts to a not so insignificant €130bn – towards financing the real economy, either directly or via co-mingled funds, which would ultimately benefit both the beneficiaries and businesses in need of funding. To that end, it would create a special regime enabling the existing vehicles to design their allocation strategies with much fewer regulatory constraints.

Locked potential
France's over-reliance on a low-risk, low-reward savings strategy has often been bemoaned by the local private equity industry. "We are working on various ways to redirect French long-term savings towards our funds. Savings are plentiful in France, but unfortunately they are not sufficiently channelled towards investments in unlisted businesses, notably SMEs and start-ups," then-AFIC chair Louis Godron told unquote" back in 2012

The trade body's annual fundraising statistics offer an interesting insight into how French private equity could benefit from the emergence of a local pension funds framework. In the first half of 2015, these vehicles contributed €106m to private equity funds – making them the smallest local LP class, contributing barely a sixth of the amount provided by the state itself, for instance. At a time when French GPs are actually building roadshows in London around meetings with the increasingly popular UK local pension authorities, surely home-grown pension funds are missing out on compelling investment opportunities.

In fact, foreign pension funds injected more than €1.1bn into French PE funds in H1 2015 – roughly 10 times the amount local schemes contributed, highlighting another potential benefit of pushing for the emergence of a true French pension funds regime. While the industry welcomed the fact that the proportion of foreign LPs investing in French private equity increased in 2015 (around 49% of all fundraising in H1 last year), thereby validating the attractiveness of the market, relying too much on overseas capital could prove tricky given the somewhat fickle nature of this relationship in the past. Building up a stable, local source of funding less easily swayed by political and economic turmoil would make more sense.

The local private equity industry will no doubt be hopeful that this project comes to fruition, but significant caveats remain. France is firmly attached to its existing pension system, the proponents of which would argue is fairer than the Anglo-Saxon "pay for your own" model, and proposed changes to this regime in the past have been met with fierce resistance. Although this principle would not be overhauled by the government's proposal, the politically sensitive nature of such a move just as Francois Hollande's administration is eager to foster goodwill in the final months before tough elections in 2017 does not necessarily bode well for the proposal's chances.

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