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Unlisted Investment: Europe’s Untapped Potential

ARTICLES - 16 December 2021

Unlisted companies, particularly SMEs, have always accounted for a large share of the French economy. Nevertheless, over the past several years, investment in these companies has seen remarkable growth. This trend has the potential to bolster economic growth and guide the digital and green transformation of French and European businesses.

To discuss these issues, Institut Montaigne and Sciences Po's School of Management and Innovation are holding a series of events on the future of investment in Europe. This article follows the third event, on investment in private equity, with Nicolas Dufourcq, CEO of Bpifrance; Alain Rauscher, CEO and co-founder of Antin Infrastructure Partners; Dominique Senequier, founder and president of Ardian; and Natacha Valla, economist and dean of the School of Management and Innovation at Sciences Po.

Unlisted investment in the broadest sense of the term has been growing rapidly over the past decades, both in France and abroad. Total alternative assets under management have more than doubled since 2010, reaching $10.7 trillion worldwide in 2020. In France, the economy is also able to absorb much larger volumes of capital than in the past. According to France Invest, investment in unlisted assets has grown from €10.7 billion in 2015 to €31 billion in 2020. 

On the one hand, the private equity industry has evolved so that it now covers a range of different investment situations. On the other, entrepreneurs’ attitudes to outside investment are changing - although apprehensions regarding external capital remain one of the main factors limiting the growth of private equity in France. The post-war generation of entrepreneurs, with their strong attachment to family capital, has been replaced by a new generation that is much more willing to open up its capital to investment funds. This change in mentality is a major source of growth for private equity, in France as elsewhere, and should continue to be encouraged. This requires the development of an ecosystem that is able not only to accompany the emergence of French unicorns, but also to support a growing number of industrial and other SMEs, thereby stimulating job creation.

France’s shallow capital markets are a major obstacle

Nonetheless, compared to other types of financing, and bank financing in particular, the share of private equity is still limited in France. The absence of pension funds, as well as dependence on the more strictly regulated life insurance industry, severely limit the depth of French capital markets.

No segment of private equity is truly financed by French savings.

This presents a major challenge for the transformation of French savings and the associated returns. No segment of private equity is truly financed by French savings. As such, most funds are forced to turn to foreign investors to raise capital.

This lack of depth in the French and European markets is closely tied to public policy, particularly at the European level: the Solvency II Directive, for instance, limits insurers’ investment capacity in unlisted companies. France’s presidency of the Council of the European Union from next January onward could provide an opportunity to address such issues.

Private equity could play a key role in the social and environmental transformation of unlisted companies

One of the main drivers of the development of private equity in the years ahead could come from its ability to accelerate and guide major corporate transformations, especially in terms of ESG. Through their involvement in the management of their portfolio companies, large investment funds have the possibility to integrate ESG criteria into their investment decisions. Following their investment, they can also encourage managers and teams to reduce their carbon footprint and to address social and governance issues, for example through the use of KPIs.

This support is all the more useful for small companies, which rarely have the resources required to initiate these changes internally. For the same reason, the EU could consider easing constraints for SMEs in its taxonomy for sustainable activities, as Basel III did when it eased lending requirements for SMEs in the Capital Requirements Directive IV (CRD IV). Given the role it now occupies in the world of finance and in corporate discussions, private equity is already addressing these issues, including in order to meet the increasingly high expectations of its investors, which match those for listed companies.

The EU could consider easing constraints for SMEs in its taxonomy for sustainable activities.

However, if the private equity industry is to play a key role in the various transitions underway in unlisted French and European companies, it must become more democratic. Private equity needs to open up to stakeholders other than institutional investors and executives who benefit from profit-sharing provisions through "management packages". It cannot otherwise claim to be in a position to lecture companies on ESG, and the wealth gap between the most and least fortunate - already impacted by the systematic use of instant-access savings accounts known in France as the Livret A - will only widen. There is therefore a need for products that would allow the general population to invest in unlisted companies in the same way professional investors would, but with lower entry barriers - say, of a few thousand euros. With a view to better educating the public and highlighting the attractiveness of such a product, the major Paris-based portfolio managers, especially the big insurers, could coordinate to give simultaneous access to such a product, for example during an annual "investment week". 

Without a direct link with the general population, the image of unlisted investment risks deteriorating further, hindering the advantages it could offer to many companies and to the wider economy.

Co-authored with Elise Lannaud, Assistant Policy Officer.

 

Copyright: Daniel ROLAND / AFP .

 

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