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Strengths and weaknesses of France as an alternative management financial centre

According to a study conducted by Reinhold & Partners, despite recognised human and technical resources, French alternative asset management, for reasons specific to the French market, and because it is suffering from a lack of image, has not developed as hoped. There are however opportunities to be seized in order to develop this management and all its related high added-value services.

Article also available in : English EN | français FR

Within the framework of its analysis of France’s attractiveness in terms of alternative asset management, the Association Française de Gestion Financière (AFG) entrusted Reinhold & Partners with conducting a study aiming to identify the strengths and weaknesses of France as a financial centre, both according to objective criteria (tax, regulatory mechanisms, etc.) and according to subjective criteria (discriminatory criteria for the location, etc.).

Based on a survey aimed at French and foreign direct alternative asset management players (the managers) but also service providers [1] and investors, the study highlighted the following facts:

A lack of image

The repetition of the following remark should be noted: the official positions ridiculing the hedge funds and alternative asset management create a negative image which no one is ready to endorse. Unfortunately this "destruction" is echoed by a lot of French institutional investors who, already greatly restricted by their own regulations, have parted with their alternative investments.
An appalling image, no domestic market, are two major hurdles to any desire to the establishment and to any possibility of development, for the existing companies.

A restricted market

In terms of alternative asset management, "France is perceived as a local place serving a local market".
Reinhold & Partners

The study shows that French alternative asset management is not generally risky enough, with returns lower than those of its British competitors [2]. It is not visible to international investors, and, therefore, does not benefit from investments from large funds of funds, family offices, or pension funds [3]. Hence, the French alternative managers’ market is not interesting for the big international service providers (prime brokers, administrators, transfer agents, but also legal advisers, software suppliers, etc.). Now, these service providers offer a great many high added-value services (start-up capital, financing, access to complex markets, sophisticated IT tools, international legal analyses, etc.) which partly escape the French managers and accentuate the difference that exists with the managers set up in better known places, mainly in the United Kingdom (international market of institutional investors) and Switzerland (large presence of private banking and family offices) in Europe.
As for the products of French law (excluding UCITS), they have had a little success in the sense that the regulator is recognised and the rules, in particular of contractual funds, are pragmatic. But this success is "little" as French language, the reference to the French legal system, and the (wrong) belief of the application of heavy taxation on these products, associated with a flagrant lack of interest of our domestic investors, are real factors of rejection.

Active and efficient competition

French alternative asset management suffers from significant competition without really reacting.
- International managers. Today, there is not really any difference in the treatment by an investor between an offshore fund and a contractual fund. Except that the offshore fund universe is considerable, and the contractual fund one is restricted. Now, whilst the international managers can conquer the world by ignoring French investors, the same does not apply for the French managers who will not develop abroad without a solid domestic base.
- The new UCITS products. A lot of people question the technical pertinence of placing alternative asset management in UCITS products. This "rule breaking" which removes the responsibility from the investor is far from insignificant. But, it’s a fact, the UCITS format allows for easy and wide distribution in Europe and benefits from this "label" in a great many countries, Asian ones in particular. Unfortunately for France, this label is associated in its image with Luxembourg. It emerges from this that "the" domicile of a fund for European distribution is Luxembourg, with some real reasons and a lot of marketing by this country’s authorities.
- Structured products. These products which "make apparently simple" what is "notoriously complicated", ... and enable regulatory arbitrages, have been hugely successful as here, also, they release the investor from a great many diligences, and can be structured on instruments which require less own funds than the alternative asset management products.

How can this situation be changed knowing that, in terms of management, success is only measured by the amount of assets under management (or under custody for the custodians)?

To be seen, you need to be visible

French alternative asset management and its ecosystem have to be made visible within the universe of Anglo-Saxon competitors. You then have to "allow to do" and arrange at least a minima the tax, social and regulatory points to enable this industry to set up in France.

1. To make it visible it has to be given the means

  • to exist: development of incubation structures, technical assistance in creation and development
  • to develop: restoring appetite and encouraging institutional investors to select French alternative asset management [4]

It is also a case of making it well known and presenting it in an attractive manner

  • to structure the multilingual hosting (one-stop-shop covering the regulations, the taxation, the social aspects), with clear and simple online documentation
  • to prove itself. As mentioned in the study, in all decisions there are objective elements and emotional elements.
    • The documentation, the websites enable "the objective" to be developed and wrong beliefs or perceptions to be corrected.
    • But the emotional must also be carefully cultivated. To be seen, known and recognised, it has to prove itself, explain and enter into dialogue. A marketing and communication strategy targeted at investors and those involved in alternative asset management in the world must be considered, in relation to the objectives of entrepreneurs and the analysis of their expectations and needs.

2. Allow to do

Allowing to do means solving the technical difficulties revealed by the study, in the fields of taxation and regulation. It also means organising host and support structures to help the entrepreneurs succeed and optimise their undertaking through the numerous laws imposed on them [5].

The certainty which emerges from this study is that making French alternative asset management more attractive is a multidisciplinary task. It must be coordinated and supported by our politicians, by our regulators - particularly alongside the investors - and be highlighted to regulators and international investors that are the most active in this field by organising events in the main places.

But practically, those who are best placed to undertake this task and the most interested in its success are the professionals of this industry. Creating a force of promotion bringing together recognised professionals, offers the two-fold advantage of creating a knock-on effect, and also financial motivation since the success of everyone is to the benefit of each individual.

Reinhold Partners , December 2010

Article also available in : English EN | français FR

See online : Reinhold & Partners full report

Footnotes

[1] By "service providers" we mean the different providers who provide direct services to the alternative asset management investors and managers. This includes, inter alia, the custodians and Prime Brokers, the analysts, transfer agents, legal advisers, auditors, etc.

[2] Investment in an alternative fund has a high cost in capital (Solvency, Basel, etc.). Hence, investors who pay "a lot" for this type of investment accept higher risk taking for higher expected returns. French tradition, resulting from the demand of institutional investors in dynamic monetary funds, is not very adapted to these new requirements.

[3] International investors make their "market" in London. It is very difficult to make them come to Paris, because they will have few visits to make, they do not want to come up against "the language barrier", etc. French managers who can meet these investors have to go to London.

[4] In this respect, it should be noted that the putting in place of the ARIA regulation and contractual funds is a missed opportunity due solely to the fact of the non-simultaneous adaptation of investor regulations.

[5] Support may also be given on "comfort" activities, such as "relocation" services, administrative help, etc.;

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Opinion French alternative management: Towards a strong financial centre.

Following to their study on strenghts and weaknesses of France as an alternative management financial centre, Reinhold & Partners give us the main considerations for moving towards a strong financial center.

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