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THE ATTRACTION OF THE FRENCH PRIVATE EQUITY MARKET AND NEW RULING OF THE "FINANCIAL INVESTMENT ADVISOR"

By Serge Ejzenberg
Posted May 4, 2005


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During 2004, France has confirmed its position as one of the leading destinations in Europe for Private Equity thanks to several legislative and regulatory changes which contributes to the development of the French Private Equity Sector.

Let’s have a look at some statistics published by the Association Française des Investisseurs en Capital (AFIC) and those from European Private Equity & Venture Capital Association (EVCA); both indicate that France continues to have the largest market.

During the first 6 months of 2004, private equity investment in France amounted to 1.8 € Bn, representing a 9% increase in funds over the same period in the previous year.

During the first 6 months of 2004, private equity investment in France amounted to 1.8 € Bn, representing a 9% increase in funds over the same period in the previous year.
LBO transactions accounted for about two-thirds of total Private Equity investments.

In the first 6 months of 2004, French private equity houses raised 865 €M, representing a 7% increase over the same period last year.
Banks remains the largest providers of funds in the French private equity, followed by pension funds and insurance companies and lastly the funds of funds for an average of 11%.

The involvement of insurance companies will evolve in favor of a more stronger commitment from them. A new agreement signed in September 2004 between the Finance Ministry and the representatives of the French insurance industry, obliges the French insurers to invest approximately 2% (for a duration of 3 years) of their total assets under management in small and medium-sized companies whose shares are not listed on a regulated market.
The current ratio is around 1,4%.
This should lead to an additional 6 € Bn to be invested either directly or through common French fund vehicles like the Fonds Communs de Placement à Risque (FCPR).

 


Reform of the Companies Securities

The Société Anonyme Collection at the Yale University Art Gallery


France has undergone some reforms for corporate securities, in order to achieve two major goals: to simplify the securities issue regime and to modernize the French securities law.
These new laws and rules apply to “stock corporations”; mainly Sociétés Anonymes (SA) and Sociétés par Actions Simplifiées (SAS), both being allowed to issue stock with limited liability for the shareholders.
The major difference is that a SA can be listed on a stock market unlike the SaS.
The SaS benefits a greater freedom in setting its own governance rules.

The changes introduced allow the French practice to provide mechanisms closer to the benchmark inspired by the US and UK practices.

 

 

Preferred Shares (Actions de Préférence)


Since June, some restriction on the rights that can be attached to a class of preferred shares are very limited.
Such rights as liquidation preference, information rights, specific voting rights and specifics rights to dividends, can now be dealt by the issue of a class of “Preferred Shares” (Actions de Préférence).

Furthermore, specific conversion rules of preferred shares into other class of shares can be drafted enabling the implementation of efficient anti-dilution mechanisms. This feature will be of interest for financial investors willing to adjust their percentage ownership on the basis of valuation of the portfolio company at the time of a liquidity event.

Other rights are being modified: voting rights can now be temporarily or definitively suppressed for a class of shares, multiple voting rights remain limited to 2 voting rights per share.
To implement more voting rights, the shareholders can elect for the SaS (Société par Actions Simplifiées).

 

Other Aspects of the reform


The legislator introduces the possibility of issuing redeemable shares.
In non-listed companies the initiative to redeem or reimburse such shares only belongs to the issuing company.
In listed companies, the by-laws can provide for the redemption of such shares at the initiative of their holder.
Redemption still remains subject to certain restrictions (Commercial Code and the applicable tax regime)

France has undergone some reforms for corporate securities, in order to achieve two major goals: to simplify the securities issue regime and to modernize the French securities law.

Wider powers are granted to the board of directors or management board to issue new securities. For instance in the absence of statutory limitations, the board can now freely issue simple bonds.
This mechanism in favor of the board allows it to be more responsive in the issue of new securities.
Of course any issue decided by the board must remain within prior authorization granted by the shareholders general meeting.
The concept of “authorized capital” is not yet recognized under the French law.

 


New Ruling on Financial Solicitation


In September 2004, the French government published a new decree related to financial solicitation activities.
These rules are extremely important to Private Equity houses as they determine the ways in which domestic and foreign private equity investment funds can be promoted in France.

Under the new French solicitation rules, the authority to promote and market French private equity funds (including FCPR’s) in France is granted only to registered financial investment advisors, credit institutions or company approved in another member state of the European Union and authorized to act in French territory.
Marketing of a FCPR is limited to “qualified” institutional investors, so the new solicitation rules don’t apply. (1)

The rules on marketing foreign equity investments funds tend to be more restrictive. The Autorité des Marchés Financiers (AMF) has generally taken the position that interest in foreign limited partnerships cannot be subject to “démarcharge” because they don’t qualify as “financial instruments”.
However, as “démarcharge” is now clearly defined as an “unsolicited contact”, it may be assumed that so-called “passive marketing is still permissible.
Therefore the selling of interest in a foreign limited partnership may fall outside the definition of “démarcharge” if it is restricted to potential investors who are not solicited on their own initiative, request information regarding interests in the fund. (2)

The AMF will provide within the next few months some additional guidance’s….

 


New Ruling on Financial Advisors


The French legislator published a new decree defining the new rules on “financial investment advisors” (Conseillers en Investissement Financier or CIF).
Those rules will apply to a broad range of investment professionals whose activity has never been subjected to regulation.
Investment advisory companies, placement agents, family offices and other private equity professionals operating in the French market (whether based in France or not) will have to review their status to determine if they are subject to this new legislation.


As defined by the French Monetary and Financial Code a “financial investment advisor” is an individual or company whose regular professional activity consists of giving advice on any of the following: transaction involving “financial instruments” (e.g. Securities), banking transaction, the supply of “investment services”, certain operations involving annuity contracts or certain passive real estate investments.
The AMF estimates that the new ruling with concern between 1 000 and 2 000 persons.

Anyone wishing to act as financial investment advisor must register with one of the French industry association that are licensed by the AMF for such purpose.
The industry association will verify that the financial investment advisor (or each of its manager in the case of a company) meets basic requirements in respect of age, personal integrity, and professional competence.

Registering with an industry association will require the Financial Investment Advisor to adhere to specific rules of professional conducts that are agreed and approved by AMF.
Those rules will require that the advisor will deal fairly and in best interest of its clients at all the time.
This will enable the Financial Investment Advisor to “know your client’ rules requiring them to enquire about their client’s situation (financial, legal,…) before giving them any advices.

Any person convicted of a crime or other serious offence in the last ten years will not be able to register.
The financial investment advisor will have to subscribe to a liability insurance coverage.

Each “Financial Investment Advisor” will receive an individual registration number which must be communicated to all existing and potential clients and which must appear on all documents issued.
Failure to register could have severe consequence: up to 5 years in prison and/or 375 000 € fine…

Even if the general regulatory framework has been adopted, it’s still too early to know how all these rules will be applied.

Over the next few months, the AMF will update its “Réglement Général” setting out more specific rules in this area.

This initiative which may at first being considered as a limitation and a barrier to Private Equity, is really a new and sound direction in favor of a deeper professionalism of some of the activities linked to the Private Equity environment…which is very good !!!

 

 


Serge Ejzenberg
Président de l’Association Alexis de Tocqueville

 

  1. The French Monetary and Financial Code defines a « qualified » institutional investor as a legal entity having the ability and resources required to understand the risks that are inherent in the financial markets. Individuals are excluded from this definition. A decree sets out a list of all entities that are deemed to be “qualified” investors. This list includes banks, insurance companies and most other regulated institutions. It also includes commercial companies whose total consolidated assets are greater than 150 €M and who will elect to have this status. Foreign investors in an equivalent category in their country of establishment may be considered “qualified” investors. (^back to the text)
  2. Such an exception doesn’t apply when the promoter physically goes to the home, office, or other place where financial products are not usually proposed. In such a case, the solicitation is always subject to financial solicitation rules, even though the client requested such a meeting. (^back to the text)
 
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THE ATTRACTION OF THE FRENCH PRIVATE EQUITY MARKET AND NEW RULING OF THE "FINANCIAL INVESTMENT ADVISOR"
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