Is it worth investing in Private Equity in 2023?

While the stock markets are frenetic and galloping inflation is devouring the capital of savers, 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 that could be very damaging for investors? So, is it worth investing in Private Equity in 2023? Is this the right time? How to do it ? What resources to target? Which envelopes to choose? Find out 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 of all, we recall that private equity, ie investment in unlisted companies, represents an alternative to stock market investment in listed companies for investors who wish to invest in the real economy. And if the unlisted is riskier (higher risk of bankruptcy, higher risk of illiquidity, etc.), it is also potentially more profitable, which is also its main asset. In fact, it may be about investing in promising young companies, in the initial stage, i.e. in an early stage of development. If successful, the added value can then be substantial.

Be careful however, the unlisted is not a miraculous investment and the current situation is not without repercussions on private equity. Furthermore, if we are used to considering that it is a type of investment largely foreign to the financial markets, the current context tends to demonstrate that this statement is not always true. In 2022, high inflation, rising key rates and falling stock markets accompanied a significant decline in the valuation of a large number of startups. According to data from the annual report of the Atomico venture capital fund entitled “State of European Tech 2022”, European startups saw 400 billion euros of valuation go up in smoke in 2022. The valuation of the European tech sector went from 3,100 billion dollars at the end of 2021 to 2,700 billion dollars at the beginning of December 2022. The sudden disappearance of European unicorns, an endangered species, is also interesting! Thus, in 2021 there were 105 new startups valued at over one billion euros against 31 new unicorns in 2022 and the Atomic report does not specify how many unicorns have lost their title in a year.

This inventory of European startups is representative of the private market, suffering from rising interest rates and the end of the magic money that may have existed in 2021. After a banner year in 2021, private fundraising and investing Equities suffer. The deteriorating business climate is being felt in the sector. However, opportunities still exist and it is still possible to make profitable investments in private equity.

How to invest in Private Equity in 2023? Goods and envelopes to consider

You want to invest in private equity in 2023 but you don’t know how. There are several ways to position yourself among the unlisted. First, you can invest directly in shares of unlisted companies. This is undoubtedly the most difficult access mode since it implies that you identify attractive companies yourself and that you have capital large enough to comply with the essential rules of diversification knowing that for a single company, the entrance fee can be quite high. You can also invest in unlisted stock markets. Indeed, there are publicly traded private equity firms whose assets are made up of unlisted companies in which they have invested. Finally, it is possible to invest in private equity through funds. There are two main types of Private Equity funds: ETFs or trackers that track the performance of private equity management companies and funds dedicated to Private Equity, FCPR (Fonds Communs de Placement à Risques). These private equity funds are invested in securities of unlisted companies up to a minimum of 50%. Some types of FCPR also allow you to benefit from significant tax advantages. Therefore, the investment in FCPI (Innovation Mutual Funds), invested for at least 60% in securities of innovative and unlisted European SMEs and SMEs, as well as in FIP (Local Investment Funds), invested for at least 60% in securities of Innovative European SMEs SMEs, which carry out their activity mainly in a geographical area chosen by the fund and located in four neighboring regions, is accompanied by a reduction in income tax equal to 25% of the sums invested upon subscription and by capital gains tax exemption on exit from the fund (if the units have been held for at least 5 years).

These different types of assets can notably be housed in a PEA-PME or unit-linked life insurance products.

The PEA-PME is particularly efficient from a tax point of view as it allows you to hold shares in unlisted companies or funds, all with total income tax exemption provided that the plan has been maintained for a minimum of 5 years. Please note that income tax contributions 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, but payments to the classic PEA cannot exceed €150,000. There are also constraints on eligible qualifications. In fact, to be admitted to the PEA PME, companies must have their registered office in France or in another member state of the European Union or in another state belonging to the European Economic Area. Furthermore, they must be subject to corporation tax under the conditions of the 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 sheets) and which employ fewer than 5,000 people, listed and unlisted, are eligible. FCPRs (including FIP and FCPI) are eligible for PEA-PME as are some trackers. Furthermore, ETFs can allow you to expose your portfolio to the non-European Private Equity market through the use of derivative instruments.

It is also possible to invest in Private Equity from the unit-linked (UC) holders of your life insurance. Thus, it is possible to position oneself on the unlisted market by taking advantage of the tax advantages of life insurance and in particular the reduction of 4,600 euros for a single person and 9,200 euros for a couple applied every year also to capital gains from redemption, and taxation only at 24.7 % plus 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 one person and 300,000 euros for a couple.

But be careful, not all life contracts have the same unit-linked offer and some are broader than others, especially as regards investment possibilities in the unlisted sector. However, if your insurer permits, you can invest in shares of listed private equity firms, but also in ETFs and funds, the Pacte Act has made professional investment capital funds (FPCI) eligible for life insurance contracts unit-linked. However, this type of investment cannot exceed 50% of the outstanding amount.