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Interview of Gorka Gonzalez, Head of Retail at Bpifrance, as feature in Insight/Out Magazine #21
Gorka Gonzalez shares the lessons learned on France’s first retail Private Equity Fund aimed at non-professional investors from EUR 5 K.
What are the reasons behind the creation of the fund Bpifrance Enterprises 1 (BE1)?
We launched “Bpifrance Enterprises 1” in October 2020 for two reasons. The first was to facilitate access to Private Equity to non-professional investors in France. This was motivated by the French government’s and our wish to develop the ecosystem, to allow individuals in allocating money in Private Equity, and to better leverage private savings in France. The second was to advocate for sharing the profit generated by Private Equity with a wider audience. We contributed to this trend through the use of the French vehicle FCPR Fonds Commun de Placement à Risques) accessible to non-professional investors where we shared access to our own portfolio that has been investing in Private Equity since 1998.
Could you present Bpifrance Enterprises 1 in a few words?
Bpifrance Enterprises 1 was our first attempt in targeting retail investors. When we started working on it, we had to tackle a few obstacles.
The first hurdle for non-professional Private Equity investors remains capital preservation. To address these fears, we pushed forward diversification as the main market risk mitigator. We set-up the fund with 145 Private Equity and Venture Capital funds (fund of funds strategy) composed of 1.500 underlying companies. We offered a wide diversification through vintages, varied GPs and different levels of fund maturity. This factor is also reflected in the type of portfolio companies. As for geographical allocation, France is well represented with around 70% of underlying companies, alongside 9% from the US and 15 % from the EU.
The second obstacle was the long-term investment horizon of Private Equity. We came with a solution of six years plus one – which is a short period in Private Equity terms.
The third hurdle was the illiquid characteristic of Private Equity investments. We are however a secondary Fund of Funds, and we can therefore return the money the first year. One year after the launch we returned 25% of the commitments. The idea was to get an optimised “J” curve return in terms of return and liquidity profile.
Once these obstacles were addressed, it was important for us to define a minimum entry ticket lower than what already existed on the PE market of EUR 5.000, and a maximum EUR 95.000 in order to allow for a wider amount of people to invest in our Private Equity solution.
What are the results of Bpifrance Enterprises 1?
In terms of quantitative results, we collected EUR 95 million in nine months (the target size) – three months before the final closing – from more than 4.000 investors. For Bpifrance, it was important to set up an opened & multi-channel distribution to offer this solution through different investment vehicles. Investors included French life insurance contracts – representing 70% of the commitments of the fund, French pension manager (“Gestionnaire d’Epargne Retraite”) and the online plate-form built up with our partner 123 Investment Managers reached 1.500 investors directly via internet, without any intermediary.
On the qualitative side – beyond collecting the target EUR 95 million – our objective was to raise awareness regarding this asset class and connect the PE ecosystem with this Retail segment. We reached 8 million people thanks to our PR efforts and our online activity: our video trailer amounted to near two million views and our dedicated online platform welcomed 105.000 unique visitors generating strong awareness and interest. Soon after, other French Private Equity players launched similar initiatives. We are very happy to witness this trend as we need more players to change the model and build momentum.
What are the operational characteristics of the fund?
The process to set up this structure internally was challenging. We sliced our own portfolio – investments made by Bpifrance from 2005 to 2016 -, and undertook two transactions simultaneously. We sold exactly the same portfolio as “Bpifrance Enterprises 1”, and another to professional investors in order to define a market price for Retail investors based on competitive and opened selling process managed by third-party firm. Setting up such a vehicle for first time, understanding the marketing, distribution and the stringent regulatory implications of the ecosystem was an intense process.
Finally came the creation of the online subscription platform – the subscription could fully be digital –, which was operational on the 1st of October (2021). As a whole, it took us 18 months of planning – in the COVID content – before launching the first fund.
We also contacted our GP partners to inform them about the rationale of this Retail initiative, keeping the full management of these 2 new vehicles (GP-led transactions). Overall, the transaction was very well understood by our portfolio GPs and some of them are now thinking in leveraging more broadly on the Retail segment!
The fund Bpifrance Enterprises 2 has just been launched. What is new about it?
Following the success of Fund I, we wanted to consolidate this movement in the market as several initiatives are needed to achieve long-term success. We decided to launch our second fund which, similarly to the first, is a secondary Fund of Funds. The main difference is that we changed the portfolio’s asset allocation. We sliced this time vintages between 2010 and 2016 as we believe older vintages did not have enough value to be put again on the table. We brought in 20% of assets managed by Bpifrance Investment, demonstrating we had “skin in the game”. It included the portfolio of two funds: one diversified SME fund specialised in French regions, and a buyout fund focused on mid-sized companies. These two funds also have a buyout flavour in the portfolio with 60% buyout and 40% venture capital. Then we slightly twisted the fund in order to allow access to more people: the minimum ticket was lowered to EUR 3.000 and the maximum to EUR 50.000.
We kept diversification as our unique selling proposition and this time we invested in 126 underlying funds representing approximately 1.500 companies. Concerning the sector split, we are involved in technology and B2B services. There was no cherry-picking when building the portfolio. We defined our criteria, and we then sliced our portfolio based on them. This methodology has been audited by external and independent experts.
How could other countries like Luxembourg set up similar products?
We hope that other countries will launch similar initiatives as we would like to see the European Private Equity ecosystem grow. It is necessary for European players to set up such projects in their own market and Luxembourg has all the ingredients to “cook” a similar solution.
The first ingredient is Luxembourg’s wide range of vehicles (toolbox) and its ability to structure Private Equity funds aimed at non-professional investors.
The second is to find assets. Find institutional players who already manage their own assets as it is easier to come to the market with a secondary fund strategy characterized by a shortened investment horizon and better liquidity profile. It is therefore important to be in contact with investors who have a long track record of managing large Private Equity portfolios and there are several in Luxembourg.
Finally, as with all long-term strategies, you need strong sponsorship from the authorities to make it happen i.e., political willingness to capture savings and inject them into the real economy through a Private Equity solution.
Why not envisage one day a cross-border Private Equity fund for non-professional investors with a more European-focused portfolio? This could be an ambitious European project to build up and enhance altogether.
