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FCPR: a "good risk" for investors?

A focused businesswoman, her hands crossed over her desk cluttered with financial documents, illustrating the meticulous management of her finances.

The market is said to be rational. For every risk there is a premium, a potential return. Our role with our clients is to choose "the best risk", but it all depends on the "type" of risk the client is prepared to bear.

The three main ones are :

  • The risk of capital loss This is the most obvious and the greatest fear of any investor.

  • The risk of volatility Volatility is often presented as a measure of the risk of capital loss. In reality, it highlights the importance of entry and exit points on an investment. A few figures to illustrate the point: o Over the last 12 months, the CAC 40 has gained +11.54%. This is what a passive holder would record, having made no movements over the period. o On the other hand, someone who was unlucky and entered the market on March 29, 2022 at €6,829.4, only to exit 6 months later on September 29, 2022 at €5,628.42, would see a loss of -17.5%. o If, on the other hand, the investor had managed to enter at the lowest point, and therefore at the best time (still on September 29, 2022 at €5,628.42) to exit at the highest (€7,401.03 on March 07, 2023), he would have achieved a return of +31.5%. As no data analysis mechanism has yet succeeded in predicting stock market movements with any finesse, the risk of volatility seems the most complicated to control. At this stage, the principles of programmed payments and regular capping of capital gains remain the most convincing solutions. They may not enable you to optimize your investment, but they will significantly reduce your losses. Which is already a good start to improving your performance!

One-year chart of the CAC 40, from April 2022 to April 2023. Three key points: entry point, exit point, and entry and exit point.

  • The risk of illiquidity The final and most interesting risk is that the investor cannot get his money back at his convenience. For a retail investor, this may pose a problem for their assets. For a professional investor, it represents above all a "loss of earnings". By not being able to arbitrate his position, he obliterates his ability to seize a new opportunity. Their job is not to make money, but to make AS MUCH money as possible. The market therefore considers the risk of illiquidity to be a major risk. And since, as we recall, the market is rational, it assigns it a substantial risk premium. This is why, over all investment horizons, unlisted securities outperform listed ones. This is as true for private equity as it is for private debt or real estate. This observation opens up interesting prospects for investors. Indeed, liquidity risk does not represent a major risk for them, since all they need to do is plan an asset allocation that includes a coherent liquidity pocket.

Graph: Asset class returns and risks over 10 years. Comparison between traditional and alternative assets.

Choosing to take an illiquidity risk means that, for a similar prospect of return, you can reduce the risks of capital loss and volatility.

Which offers are selected from the Unlisted segment?

The asset class is vast.

In theory, it covers 95% of the real economy. Companies of all sizes, at all stages of maturity. And whose growth can be supported by equity or debt, with very different risks and valuation profiles.

For a long time, the offer was characterized by its scarcity, but more and more solutions are available for savers wishing to "invest in the real world", "give meaning to their savings", diversify their assets or decouple themselves from the financial markets (a small selection of the most frequently heard arguments...).

There is no such thing as a perfect product. Every investor and every project is different, and deserves a tailored response.

Most of our customers are keen on schemes that improve the risk/return trade-off. Let's be clear: people remain the core value of any performance achieved in the unlisted sector. The people who run the company, combined with those who know how to support it financially and strategically... But this is a humbling business, and I welcome any solutions that can serve as a safeguard against potential setbacks.

In the light of current events, 2 strategies seem particularly relevant to us:

  1. Convertible bonds, which benefit from both rising interest rates and falling corporate valuations. You'll discover that with the Entrepreneurs & Rendement range, you can also benefit from a partial capital guarantee.

  2. Secondary investments, this asset class has everything it takes to appeal to investors, since it enables them to diversify their investments, shorten their holding period and improve their overall performance objectives. When you consider that this asset class is particularly well suited to times of economic stress, it seems obvious to take an interest in it in 2023.

Convertible bonds: the best of 2 worlds.

A fast-growing company can rarely rely on bank financing alone. In addition, it can opt for a capital increase and welcome new shareholders, or resort to a bond issue on the private markets.

Each of these solutions has its advantages and limitations:

  • Bonds, for example, have the enormous advantage of enabling a manager to remain in control of his business and to know the cost of financing in advance. On the other hand, they involve interest, which is generally paid over time, and is therefore an expense. The impact of the latter on the company's profitability, and even its long-term viability, will be closely monitored by financiers through the debt ratio. A company cannot resort to debt too frequently. Typically, a company with multiple external growth projects will quickly reach the limit of its model.

  • Equities present the opposite profile. Opening up your capital means agreeing to share in future profits. In the event of dividends, of course, and above all in the event of final sale. The cost will only be known at the end. As a result, a fast-growing company anticipating a forthcoming takeover will tend to avoid this scheme.

There is another type of financing, a hybrid, which borrows features from both models: convertible bonds.

A convertible bond is a bond contract that also allows the lender to exchange the contract for a share (= a conversion option). This means that the lender can earn interest for a certain period of time, and then receive a capital gain if the bond is converted and resold. The best of both worlds!

While the advantage for the investor seems obvious, the position of the company director needs to be clarified: a convertible bond is considered as "quasi-equity" for accounting purposes, and will therefore not be included in the company's debt ratio. All that remains is to avoid conversion!

To this end, two mechanisms will be negotiated from the outset:

  • A non-conversion premium that will be paid at the end of the loan if the option has not been exercised. It reinforces the profitability of the model for the lender, who is thus encouraged to maintain its position.

  • A cap on conversion, if the company sells at a good price during the term of the loan, the convertible bondholder will necessarily exercise his right. But he will not be able to do so on all his bonds. In this way, the final cost to the company's management remains lower than that of a traditional capital increase.

In recent months, interest rates have risen. This means that an investor can expect better performance from the bond engine, but at the same time, corporate valuations have been revised downwards. This means, a priori, better conversion opportunities. Two excellent reasons to look at this asset class with interest.

A decade of trust with Entrepreneur Invest: investing in French SMEs with total security.

For the past 10 years, Entrepreneur Invest has been offering to invest in funds comprising around twenty convertible bonds issued by French SMEs.

A special feature of our offer is that it also benefits from a partial capital guarantee mechanism offered by the European Investment Fund, which automatically reduces the risk taken by investors.

This mechanism is designed to encourage investment in companies. It is therefore designed to be effective and reassuring. In concrete terms, it involves a guarantee:

  • Who will reimburse at least 50% of any capital defaults that may occur

  • Line by line: each company is individually guaranteed, independently of the fund's overall performance. If one of them suffers a setback, the guarantee will be activated, without waiting for an overall capital loss.

  • From the 1st euro: whether the capital default concerns the entire loan or just a portion of it, the guarantee will halve the impact of the loss for the fund (and therefore for savers)!

  • No time or cause limit.

  • Last but not least, interest paid prior to default will not be deducted from the guarantee. As a result, the capital risk is drastically reduced over time.

Graph: Evolution over 5 years of the EIF guarantee on bonds with coupons of 5% per annum, up to 70%.

FCPR Entrepreneurs & Rendement N°8 will be released in a few weeks' time, and will be the 11th vintage of a range launched in 2012 that has proved its resilience and regularity. The fund is available from €1,000 for both individuals and corporate investors, and also offers lower exit taxes.

Secondary: buy well-known, high-quality assets at a discount.

Many institutional investors (mutuals, insurers, etc.) are subject to regulatory risk ratios. If the market anticipates difficulties, if interest rates rise or valuations fall, these players will have to arbitrate their positions. By definition, there is no market for the resale of unlisted assets, so we speak of a "secondary market".

In such a market, the price is set according to supply and demand. If many institutional investors are selling at the same time, they will have to accept a discount. And to ensure that this discount is not too steep, they will have to give priority to selling the most sought-after, highest-quality assets.

Today, good-quality shares are trading at discounts of 30-35%. New investors can expect additional returns on their investment.

A manager specializing in secondary markets will be able to buy back investments or entire portfolios. The latter will be at least 50% invested, sometimes much more.

In addition to the discount, the buyer benefits from a better understanding of the quality of the investments and a holding period shortened by several years. And if he carries out a dozen transactions, his risk will not be spread over 10 companies, but over 150 to 200! So many arguments in favor of this asset class. Unfortunately, it is generally inaccessible to most investors.

For the past few weeks, Entrepreneur Invest has been offering a fund combining the expertise of several secondary specialists, for an even more diversified offering and an attractive performance objective. To find out more, stay tuned to your advisors...

If you'd like to find out how you can play a part in financing innovation in France by exploring the advantages of FCPRs. Read on with our next article in the #FCPR series to find out more and consider how you can help support promising start-ups. #Investment #Innovation


This document is provided for information purposes only and does not constitute an offer to buy, investment advice or a solicitation to sell. The information is inevitably partial, provided on the basis of market data observed at a given time, and is subject to change. The information contained in this document is intended for general distribution without regard to the investment objectives, financial situation or particular needs of any potential investor. Investing in this type of product involves specific risks, including the risk of illiquidity and loss of capital. Potential investors should familiarize themselves with the risk factors inherent in the product before investing. Entrepreneur Invest accepts no liability, direct or indirect, arising from the use of any information contained in this document and shall not be held responsible for any decision taken on the basis of the information contained in this document.

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