“The distribution of PE and VC products to the retail investors is only starting [in Europe],” said Remi Charrier, head of institutional client relationship at the European Investment Fund, during an interview on Monday 22 May at their office in Kirchberg.
“European institutions believe that pension funds and insurance companies are way too prudent, probably due to regulatory reasons, despite the high return potential [of PE and VC],” noted Charrier. In order to close the gap with the US market which is three time as large as the European market in PEs and VCs, Charrier believes that retail investors must contribute alongside the institutional investors and public organisations to “finance innovation, start-ups, scale ups and employment.”
To reduce the gap between Europe and the US, the public and private sectors have been active to support the private investment ecosystem through the trading of secondaries, for example, noted Charrier. Bpifrance, a public investment bank, has decided to transfer assets from its balance sheet to a continuation fund. This is an option that the EIF has not contemplated yet.
In the private sector, some players, such as Stepstone in the UK, have developed a market for secondaries for the benefit of their institutional clients (GP-led or LP-led), observed Charrier. The common denominator is that Stepstone or the EIF are both committed to help the LP investors in their respective funds to find buyers, when needed.
The financial vehicles must raise €20m to €30m in order to be profitable
The duration of the investment is the largest obstacle for retail, but also institutional investors, as the life of some funds can be as long as 15 or 16 years. However, Charrier explained that the reality is that the duration is much shorter as the cash calls do not occur immediately, and the initial investment is often returned (reflows) to the investor after perhaps six to seven years as a result of sales of companies in the fund. The rest is a “potential upside for the investors for the remaining years of the fund.”
Can you invest directly in the EIF’s funds?
Charrier explained that the EIF’s funds of funds are excluding direct investment by retail investors as their products are dedicated to “professional investors,” which under Luxembourg law refers to the concept of “well informed investors,” and that the minimum ticket is €1m to €2m depending on the product. Charrier added that the EIF is not set up to manage small ticket investments. On the other hand, family offices are active investors into the funds through their legal entities.
Yet, the EIF is currently targeting retail strategies. The first strategy has been to approach wealth management firms and private banks to aggregate small tickets to achieve a “minimum threshold.” Second, it is also aiming at investment platforms (feeders) to aggregate the funds which must ensure that the concept of “know your client” (KYC) is implemented as per the regulation. It is still unclear what financial vehicles will be used by the feeders to channel the saving of their clients. Whatever the format, “the financial vehicles must raise €20m to €30m in order to be profitable,” said Charrier. Finally, Charrier suggested that some insurance companies may integrate the EIF’s funds into insurance contracts, but no product has come out of the drawing board yet.
Charrier admitted that funds of secondaries are probably the most attractive and dynamic solutions for retail investors, as they do not have to go through the investment period of around five years whereas the reflows start very soon after the investment. Yet, Charrier explained that the discussion with local banks were focused mainly on primary funds.
Charrier expects banks to offer European long-term investment funds (Eltif) to their retail clients. Initially, he expects the Eltifs to hold a mix of assets such as primary and secondary PEs as well as tech and life science VCs to balance the risk through diversification. It appears that pure-play investments, such as funds in secondaries only, are not being currently discussed.
The process may face some obstacles from the regulators, which aim at protecting the “client-investors” against investing in product they would not fully comprehend, Charrier warned. Whatever the configuration chosen by the banks, the feeders, the insurers or the EIF, retail investors should ask detailed and tough questions about cost before investing in Eltifs or any other financial vehicles given the potential multi-layers of fees. Indeed, money may be left on the table in a fund of funds of funds.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.