Rude VC: Taxing times in French asset management

Feb 21, 2012
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This article was originally posted on Mark Bivens’ personal blog.

Capital Finance (part the Les Echos Groupe) features an article today on the discombobulations affecting the country’s tax-incentivized fund structures: FCPIs and FIPs.

I’ve written in the past on the perverse effects that these taxpayer-funded structures can have on the venture capital sector.  And for full disclosure, a significant percentage of Truffle’s funds under management are in the form of FCPIs, whose closest resemblance in Europe would probably be the UK’s VCT structure.

{As a reminder, an FCPI, or fonds commun de placement à l’innovation, is a French fund vehicle managed by venture capital firms with a requirement to invest in innovative technology companies.  An FIP, or fonds d’investissement de proximité, is a French fund vehicle that requires investment in a specific region of France.  Both vehicles raise their funds from taxpayers who are in turn offered a substantial tax credit on their income tax, wealth tax, or both}.

The article reveals the preponderant role that distributors play in the annual collection of these vehicles.  All it takes is one or two large distributors to change partners, and any given fund management company or VC firm can shift from having a banner fundraising year to falling off the map.

I’ll explore this perverse distribution game another time, but in the meantime, invite you to read the full article here (subscription required, though a free trial is sometimes available).

For me, however, the money shot of the article is a citation from an anonymous professional of the sector:

« Les ratios, délais et contraintes de toutes sortes se sont multipliés, selon qu’il s’agit d’un FIP ou d’un FCPI, d’un fonds ISF ou IR.  Un véhicule fiscal peut désormais devoir satisfaire simultanément jusqu’à quatorze obligations différentes, voire contradictoire. »

Roughly translated: [The ratios, deadlines, and myriad investment constraints governing these fund structures have ballooned.  Such vehicles nowadays often find themselves in a situation of having to satisfy up to 14 different investment constraints concurrently, some of which can even be contradictory.]

This is unhealthy.  As we’ve witnessed with the U.S. tax code, legal complexity combined with high stakes benefits the lawyers not the entrepreneurs.