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While the stock markets are hectic and galloping inflation is eating into savers’ capital, investing in Private Equity may seem like a good idea. However, there are many pitfalls to avoid and it is also better to know that the unlisted is currently going through a turbulent phase which might be very harmful to investors? So, should we invest in Private Equity in 2023? Is this the right time? How to do it ? Which assets to target? Which envelopes to choose? Discover in this article everything you need to know before investing in Private Equity in 2023.
Investing in private equity in 2023: a turbulent market that remains potentially attractive
First, remember that private equity, i.e. investment in unlisted companies, is for investors who wish to invest in the real economy an alternative to stock market investment in companies listed. And if the unlisted is more risky (increased risk of bankruptcy, greater risk of illiquidity, etc.), it is also potentially more profitable, which is also its main asset. Indeed, it may be a question of investing in promising young companies, in the early stage, that is to say at an early stage of development. If successful, the added value can therefore be substantial.
Be careful all the same, the unlisted is not a miracle investment and the current situation is not without impact on private equity. Moreover, if we are used to considering that this is a type of investment that is largely unrelated to the financial markets, the current context tends to show that this statement is not always true. In 2022, high inflation, the rise in key rates and the fall in stock markets have accompanied a significant drop in the valuation of a large number of start-ups. According to the figures of the annual report of the venture capital fund Atomico entitled “State of European Tech 2022”, European start-ups have seen 400 billion euros in valuation go up in smoke in 2022. The valuation of the European technology sector tech has gone from 3,100 billion dollars at the end of 2021 to 2,700 billion dollars at the beginning of December 2022. Also interesting is the meteoric disappearance of European unicorns, a species on the verge of extinction! Thus, in 2021 there were 105 new start-ups valued over one billion euros compared to 31 new unicorns in 2022 and the Atomico report does not specify how many unicorns lost their title in one year.
This inventory of European start-ups is representative of the unlisted market, which is suffering from the rise in interest rates and the end of the magic money that may have existed in 2021. After an exceptional year in 2021, fundraising and Private Equity investments suffer. The deterioration of the business climate is felt in the sector. However, opportunities still exist and it remains possible to make lucrative investments in private equity.
How to invest in Private Equity in 2023? Assets and envelopes to consider
You want to invest in private equity in 2023 but don’t know how to go regarding it. There are several ways to position yourself on the unlisted. First, you can invest directly in shares of unlisted companies. This is undoubtedly the most difficult means of access since it implies that you identify attractive companies yourself and that you have a sufficiently large capital to respect the essential rules of diversification knowing that for a single company, the Entrance ticket can be quite high. You can also invest in the unlisted on the stock markets. There are in fact private equity companies listed on the stock exchange whose assets are made up of unlisted companies in which they have invested. Finally, it is possible to invest in private equity via funds. There are two main types of funds in Private Equity: ETFs or trackers that replicate the performance of private equity management companies and funds dedicated to Private Equity, FCPRs (Fonds Communs de Placement à Risques). These private equity funds are invested in securities of companies not listed on the stock market up to a minimum of 50%. Certain types of FCPR also allow you to benefit from significant tax advantages. Thus, investment in FCPIs (Innovation Mutual Funds), invested for at least 60% in securities of innovative and unlisted European SMEs and SMIs, as well as in FIPs (Local Investment Funds), invested for at least 60% in securities of innovative European SMEs, carrying out their activity mainly in a geographical area chosen by the fund and located in four neighboring regions, is accompanied by an income tax reduction of 25% of the amounts invested upon subscription and an exemption from tax on capital gains upon exit from the fund (if the units have been held for at least 5 years).
These different types of assets can in particular be housed in a PEA-PME or in unit-linked life insurance products.
The PEA-PME is particularly tax-efficient since it allows you to hold shares in unlisted companies or funds, all with total exemption from income tax as long as the plan has been kept for a minimum of 5 years. Please note that social security contributions on earnings remain due. The PEA-PME has a ceiling not to be exceeded which amounts to 225,000 euros. However, if the investor also has a classic PEA, then the cumulative ceiling of the two PEAs is also 225,000 euros, but the payments to the classic PEA cannot exceed 150,000 euros. There are also constraints on eligible securities. In fact, to be eligible for the PEA PME, companies must have their registered office in France or in another Member State of the European Union or in another State that is part of the European Economic Area. In addition, they must be subject to corporation tax under the conditions of common law or to an equivalent tax. In terms of capitalization size, companies whose turnover does not exceed 1.5 billion euros (and 2 billion balance sheet) and employing fewer than 5,000 people, whether listed or not, are eligible. . FCPRs (including FIP and FCPI) are eligible for PEA-PME as well as certain trackers. Moreover, ETFs can allow you to expose your portfolio to the non-European Private Equity market through the use of derivatives.
It is also possible to invest in Private Equity from the unit-linked (UC) supports of your life insurance. Thus, it is possible to position oneself on the unlisted by taking advantage of the tax advantages of life insurance and in particular the reduction of €4,600 for a single person and €9,200 for a couple also applied each year to gains from redemptions, and taxation at only 24.7% beyond that when the contract has been held for more than 8 years and the outstanding amount does not exceed all contracts combined 150,000 euros for a single person and 300 000 euros for a couple.
Be careful though, not all life insurance contracts have the same unit-linked offer and some are more extensive than others, particularly with regard to the possibilities of investment in the unlisted. However, if your insurer allows it, you can invest in shares of listed private equity companies, but also in ETFs and funds, the Pacte law having made professional investment capital funds (FPCI) eligible for unit-linked life insurance contracts. However, this type of investment cannot exceed 50% of the outstanding amount.