18 September 2015

A new French investment vehicle

As reported in a previous edition of Private Equity Comment, France is continuing its strategy of welcoming foreign investment and has created a new investment vehicle aimed at the private funds market. The Société de Libre Partenariat (SLP) will soon become a reality as part of the package of economy-boosting measures included in the Macron Act, passed by the French National Assembly in August. It is hoped that the SLP will encourage investment by non-French investors because, although several large French private equity funds already have a significant number of international investors in their funds, domestically focussed smaller managers have struggled to raise money outside France.

The SLP will – like limited partnerships in other jurisdictions – need to have at least one general partner responsible for the day to day running of the fund (which can be delegated to a separate management entity), and at least one limited partner, whose liability will be limited but who must remain passive. The fund must also have a statutory auditor and a depositary. As envisaged during the legislative process, the SLP will have separate legal personality, unlike the English limited partnership and the SCSp in Luxembourg, and could consist of legally separate sub-funds.  Crucially, there will be no constraints on what an SLP can invest in, which is a key difference to the Fonds Professionnel de Capital Investissement (FPCI, previously known as the FCPR, and the most popular existing private funds vehicle in France). This distinction is important because, although the FPCI/FCPR has worked well for French investors in the past, investment quotas, as well as general unfamiliarity with the legal structure, has meant it has not been attractive to international investors.

A key feature of a fund vehicle is, of course, its tax status.  It was originally envisaged by French policy-makers that the SLP would be tax transparent (like a typical limited partnership) but it has now been decided that the French tax authorities will apply the same tax regime to the SLP as they have to FPCI/FCPRs. This means that: a tax charge (if any) will arise only when the fund makes a distribution, not when it realises income or capital gains; the SLP will not be subject to any income, corporate or other local tax at the level of the fund; and distributions to investors will be treated as if the investor had held its investments in the portfolio companies directly. The SLP will therefore be a tax-neutral structure for foreign investors. It is of course for the tax authorities in other countries to decide how to treat this new vehicle for tax purposes, but it is understood that the legal features of the SLP will be such that it should generally be considered as tax transparent in several important jurisdictions. This will be a boost for French private equity houses raising money in countries such as Germany, where the SLP (unlike the FPCI) should be treated as tax transparent. Given that the tests for tax transparency applied by the UK tax authorities are complicated, whether the SLP will be treated as tax transparent in the UK is not yet clear.

It is very early days for the new vehicle but it has already attracted attention from international investors who are more used to the English LP or the Luxembourg SCSp. And as the launch of the SCSp in Luxembourg has been extremely successful, no doubt the French authorities will be hoping for a similar market reception.

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