In 2014, French authorities introduced the PEA-PME framework aimed at supporting the funding of local SMEs. InvestmentEurope has caught up with managers to review it.
The funding of micro, small and midcap companies in France by highnet- worth individuals is core to a number of fiscal packages, including the PEA-PME framework, set up by the French government in March 2014.
As this last package is aimed at reorienting French savings into the financing of French SMEs (PMEs in French), PEA-PME eligible funds must be at least 75% composed of listed eurozone SMEs. But four years on, the results of the PEA-PME framework did not quite match expectations.
As of 30 June 2017, the Bank of France tallied 65,529 PEA-PME accounts for €1.1bn of assets managed – far from the billions of euros targeted by Pierre Moscovici, French minister of Economy when the PEA-PME accounts were launched.
Sébastien Ribeiro, portfolio manager at Keren Finance, runs the Keren Essentials fund, eligible for the PEA-PME framework. He says that despite the fund’s strong inflows and performance the correlation between these positive results and the PEA-PME envelope is not obvious at all.
According to Ribeiro: “Investing in a PEA-PME fund only presents an interest if one’s PEA fund has been entirely fulfilled – capped between €150,000 and €300,000 depending of the marital situation. Around 65,000 PEA-PME units are currently tallied by the Bank of France. When they were launched back in 2014, we expected some €4bn of assets to be managed under that framework. Currently assets managed in PEA-PME units may amount to around €1bn.
“European small caps, especially French ones, have performed well over the last couple of years but inflows cannot be attributed to the PEA-PME envelope. We estimate than 10% of the inflows seen in Keren Essentiels come from the PEAPME framework,” Ribeiro outlines.
His view echoes that of Mehdi Rachedi, head of Retail for France and Monaco at Natixis Investment Managers, which manages a few strategies that are eligible to the PEA-PME framework and an affiliate of the group, Dorval AM, runs another eligible fund, the Dorval Manageurs Small Cap Euro fund, soft closed in 2017.
Rachedi says: “Inflows to our European small and mid-cap funds have been supported by the rally of the segment over the last two years, regardless of the PEA-PME framework which has never had a decisive role in investors’ decision.
“The PEA-PME framework remains a strong constraint for our fund managers and we even decided to remove the eligibility of a Dorval strategy as it would not draw further inflows.”
Although Rachedi adds that Natixis IM had bet on a greater success of PEA-PME funds – which did not happen – he thinks it is still interesting for an asset manager to provide a compliant offer, since there is always a niche market to be addressed with these solutions.
Both Ribeiro and Rachedi point out that the segment addressed by the PEA-PME accounts is too niche and that has been certainly an issue in the marketing of the package.
“Perhaps the number of households entering into the scope of the PEA-PME framework has been overestimated.
“In addition, the financial incentives that get along with the PEA-PME package seem less appealing than those of other vehicles such as FCPIs (French mutual funds focusing on innovation), even though there is a real gain in fiscal terms for whoever has fulfilled his PEA,” says Keren Finance’s fund manager.
The eligibility scope of the PEAPME units should not have been limited to individuals that had already filled their PEAs, he reckons.
Among fund buyers, mixed views are expressed as well. Lucas Strojny, head of Discretionary Mandates at Advenis Investment Managers, says PEA-PME funds have been put aside from the firm’s selection even though they could have boosted returns.
“We see huge size and liquidity risks and several funds that are compliant with the PEA-PME rules have closed.
“We have to preserve our clients’ capital. If a liquidity crisis arises, whatever we would lose by being invested in a traditional small cap fund, we would lose it twice or three times more by being invested in a PEA-PME fund,” Strojny explains.
Marc Terras, CIO open architecture long only asset allocation at Rothschild Asset Management, says his company was running two in-house funds, compliant with the PEA-PME regulation, before Rothschild AM merged with Martin Maurel Gestion, also running one.
“Track record is quite short on this segment. We have eight funds on our buy list which is enough to cover the segment but we would raise their share if necessary.
“We run classical due diligence on these funds with a specific focus on the experience of the fund manager in small caps and liquidity,” he adds.
A MATTER OF SPECIALISTS
Like a number of players interviewed, Amiral Gestion’s business development head Benjamin Biard says the firm enjoyed the launch of the PEA-PME framework that coincided with the launch of the Sextant PME fund, invested in French SMEs, back in January 2014.
If Biard observes that PEA-PME eligible funds remained among best performers over the last few years, he underlines however that they have not been selected within PEA-PME accounts but rather in other fiscal packages. Hence he terms “mixed” the commercial success of PEA-PME accounts despite better figures recorded in 2017.
Nevertheless Biard highlights that not every asset manager can provide a PEA-PME offering, given the hard work required to analyse SMEs.
“SMEs reflect the dynamism of a geographical area. We are lucky in Europe to count some 1,700 companies that are eligible according to PEA-PME criteria and whose market cap exceeds €50m. This richness gives a glimpse of very appealing opportunities for an investor, who is patient and rigorous in his analysis.
“Often, these companies require extra work because the information is not available or does not exist. For instance, around half of stocks held in Sextant PME are either not covered or covered by only one analyst. That means we have to grasp the business as well as the regulatory and competitive environments, to go on site, meet providers and clients in order to finally forge ourselves a conviction on the valuation and the intrinsic quality of the company.
“Therefore a PEA-PME offering cannot be decreed but it is a job for specialists. The capital of experience accumulated by the fund managers is particularly crucial,” explains Biard.
Currently, the French government is preparing the forthcoming Loi Pacte, intended to support yet further funding of local SMEs, possibly through new mechanisms.
Keren Finance’s Ribeiro says any regulation favouring the shift of French individual savings into the real economy is good not only for the smid cap equity asset class but for the French economy globally.
All will depend of the implementation of the new rules, he argues, while Natixis IM’s Rachedi notes the government’s push for more funding of French SMEs.
“We will see if the PEA-PME framework could have a role to play over the long term.
“The French authorities might implement something new to bolster this type of investment but what matters to us as asset managers is to have the right offering if a new framework is issued by the government and adopted by French insurers,” Rachedi says.
Amiral Gestion’s Biard brands fundamental the support of SMEs, given they are a essential driver for the functioning of the society and a growth relay for the future.
This article was first published in the March 2018 edition of InvestmentEurope.