French retail funds: Feeling the strain

France's FCPI and FIP retail funds were introduced in 1997 and 2003 respectively, to encourage investments from individuals in French small and medium enterprises (SMEs). FCPIs focus on innovative companies, while FIPs are dedicated to local businesses (located in the four regions surrounding the fund's base). Both offer investors a tax rebate on either their income tax (IR vehicles) or France's wealth tax, which only applies to individuals owning more than €800,000 worth of assets (ISF vehicles).

While these funds have proven very popular since their inception, it would seem that the downturn took its toll on both structures. According to a study carried by AFIC, FIP and FCPI vehicles attracted 125,000 investors in 2010, down 8% from 135,000 the previous year. In addition, total commitments decreased by 7%, from €963m to €894m. On a positive note, the average commitment remained relatively stable at €6,700 per investor.

It would seem logical to blame this lacklustre performance on a tougher economic environment, which saw individuals less inclined to lock up their hard-earned cash for a 10-year period. But, as AFIC delegate general Paul Perpère points out, a closer look at the study results reveals a disparity between IR and ISF vehicles which calls for a different explanation.

The decrease in total commitments is indeed concentrated on ISF vehicles, which only attracted €322m in 2010 - a 20% fall from 2009 levels. By contrast, fundraising for IR vehicles remained stable. According to Perpère, ISF vehicles suffered from the tax rebates offered on other forms of investments: "The ISF tax rebate on FCPI/FIP vehicles is less than the one private investors would get by investing directly in a SME or a holding company; the rebate for retail funds is set at 50%, while it goes up to 75% for direct investments." Some might call this unfair competition, but it is easy to see how direct investments seemed a much more attractive proposition to private investors.

Nevertheless, Perpère remains optimistic about the situation given the challenging economic environment. "Of course, it would have been good to see more money being raised - but the fact that fundraising for IR (income tax) vehicles remained stable is a very positive sign. It shows that this type of vehicle has established itself as a reliable source of funding for innovative companies" he notes.

Perpère also believes that fundraising could pick up in 2011, as the recently voted budget brought tax rebates for direct investments in SMEs and holdings down to 50% as well - which would mean less competition for ISF funds. But, on the other hand, the same budget cut the tax rebate on IR vehicles from 25% to 22%... While this measure was widely criticised by the venture industry, Perpère hopes the current political agenda will push the legislator to review its position: "Another important factor on the industry radar is a potential reform of the ISF tax, which is currently being considered by the government. If this tax was to be abolished - along with the rebates - we would welcome stronger incentives on the IR vehicles to encourage fundraising."

The dip in fundraising for retail vehicles is far from catastrophic, but it highlights the negative impact of an unpredictable fiscal framework on these structures as Perpère notes: "FCPI and FIP fundraising would definitely benefit from a more stable fiscal environment".

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