What is private equity?
in Private Equity is an Anglo-Saxon term that literally translates to “actions of a private company,” but the best equivalent in French would be “investment capital.” In this article, we will use these two terms interchangeably. Let’s get a little more detailed:
How private equity works
Investment capital (or private equity) consists of invest in the capital of a company that is not listed on the stock exchange. The goal for the investor is to be able to resell their shares in the future with a possible capital gain. Therefore, he will definitely choose a company with significant growth potential.
In France almost 2 million non-listed commercial companies (compared to barely 1,000 on the list), therefore, there is no shortage of opportunities… as long as you know how to find them, because opening capital is not a normal operation in the life of a company. For a private investor, the easiest way to go private equity funds managed by a team of professionals as we will explain later.
What is the benefit for the company from selling part of its capital to new investors? The main reason is that this transaction provides him with liquidity, which he does not have to repay (unlike debt).
There are 4 forms of investment capital:
- venture capital, which involves investing in a newly established business that needs money to grow quickly. The most famous example is startups entering the first round.
- development capitalwhere the company already has a certain maturity and seeks to increase its production capacity.
- Transmission capitalwhich consists in the redemption of the share of shareholders who wish to leave the company (for example, in connection with retirement).
- Working capitalwhen a company is in financial difficulty: an investor buys shares at a bargain price in an attempt to get the company back on its feet.
What kind of performance to expect?
Private equity is a potentially high performing asset class. average return over 10%. In France, Private Equity provides an average annual return of around 12% over 15 years. That’s more than most asset classes!
Of course, if the return is high, then the level of risk is also high. There are basically two of them:
Risk of capital loss which can be partial (the case when the shares are resold at a loss) or complete (the case when the company goes bankrupt and the shares are no longer worth anything). Therefore, it is important to diversify by investing in several non-listed companies or, more simply, in stocks of diversified funds.
Liquidity risk, since the shares he owns are difficult to transfer. Unlike registered shares, which can be traded in seconds on the stock market, private equity is an over-the-counter market. Therefore, it is possible that he will not be able to sell his securities unless a buyer appears.
Different Ways to Invest in Private Equity
There are various ways to invest in unregistered companies:
- through a mutual fund, the easiest solution for individuals
- through a “pure” private equity fund, a solution that is difficult to access
- live, extremely difficult for the uninitiated
Investing in a mutual fund with a tax advantage
A mutual fund is a diversified portfolio of assets, usually company stocks. It is managed by a management company that is responsible for asset selection, arbitrage… Thus, the investor does not need to manage, so mutual funds are investments well suited for individuals.
In France, there are 3 mutual funds for non-registered companies: FCPR, FCPI and FIP. And the icing on the cake: they let you take advantage of tax breaks!
FCPR (risk mutual funds) consist of at least 50% of the shares of non-listed companies; the other half could be invested in listed securities to be used to increase liquidity and diversify the fund. By subscribing to FCPR units, you receive a tax advantage in the event of a resale: any realized capital gain will only be taxed up to 17.2% (instead of 30%).
FCPI (Fonds Commun de Placement pour l’Innovation) works in the same way as FCPR, except that at least 60% of the fund must be invested in innovative companies that invest in research and development. By subscribing to FCPI units, your potential capital gains are taxed at a rate of 17.2% (instead of 30%) and you can also reduce your tax base by 18% on the investment amount (however, the tax credit is limited to 3,000 euros per year for one person and 6,000 euros per year for a couple).
FIP (Proximity Investment Funds) must be composed of at least 60% mid-sized companies and be based in a designated region of France. The tax advantage is the same as the FCPR.
Invest directly or in a 100% Private Equity fund
The mutual funds we have presented above rarely invest 100% in private equity. Indeed, they very often contain a certain percentage of registered shares to increase liquidity and diversification.
Do you want to invest only in private equity? There are two alternatives to this:
First decision: You invest in a private company. It is possible, but for this you need to devote time to this, have good knowledge in the field of investments and a significant financial surface. In addition, it will be difficult for you to diversify into several companies.
Second decision: choose a 100% Private Equity investment fund.. In France, we can mention large Private Equity funds such as Ardian, Omnes Capital, Isatis Capital, Idinvest, Eurazeo… Unfortunately, the entrance fees are often prohibitive (several hundred thousand, even several million euros), making it inaccessible to most contributors.
Life Insurance: The Best Package to Invest in Private Equity
As we explained in our guide to how life insurance works, this tax package is one of the best savings products due to its flexibility and the tax benefits it enjoys.
However, the access that life insurance gives to asset classes depends on the insurer. But it turns out that Private Equity is very rarely offered as part of this package.. Filao Invest, one of the few life insurance companies offering private equity investments, we are about to introduce.
Filao Invest is a life insurance contract with multiple pillars, i.e. it gives access to both the fund in euros and the units of account. It is insured by MIF, one of the largest French insurance and savings institutions.
Here is a summary of the characteristics of Filao Invest life insurance:
|Contract type||Multiple life insurance|
(1% if the unit is tied to an arbitrage fund in euros)
|Euro funds||euro fund MIF|
|Eurofund return in 2021||1.7%|
|Accounting units||ETFs (2)
Private equity (2)
|Management fee for unit-linked funds and funds in euros||0.6%/year|
Filao Invest is a 100% online life insurance policy that applies reduced fees: no opening/closing fees, €0 payment or arbitrage fees… It is also known for its excellent Euro MIF fund, which every year shows results above average.
First of all, Filao Invest allows you to invest in 2 excellent private equity funds:
- Amundi Flag Officer of the Territories, an FCPI managed by Amundi (a leading European asset manager with 1,600 billion euros under management!), which aims to invest in sustainable and profitable SMEs and ETIs. The target net income of this fund is about 8% per year.
- Idinvest Private Value Europe 3FCPI, which selects medium-sized companies (TMIs) based in Europe and OECD countries. He invests directly in the capital of companies, as well as in debt that allows them to be acquired (unique debt, mezzanine, etc.). Its target return is also 8% per year.
In conclusion: should we invest in Private Equity?
Investment capital is an interesting asset class for your diversified portfolio. The expected return is attractive, but be aware of the risks of losing liquidity and capital.
There are different ways to invest in private equity: invest directly, through private equity funds or mutual funds in order to receive tax benefits (FCPI, FCPR and PFI).
For the private investor, the best solution, in our opinion, is to invest in FCPI mutual funds through good life insurance. Therefore, we recommend Filao Invest, the new 100% online life insurance from MIF insurance company.