French insurers to ramp up PE investment

The French insurance industry is on the verge of being forced to increase its exposure to the country’s private equity sector, according to a report.

A report in the Financial Times says French finance minister Nicolas Sarkozy will later today present a commitment on behalf of French insurers to invest an extra €6 billion ($7.3 billion) into the country’s private equity industry over the next three years.

The commitment is understood to be detailed in a letter that has been signed by representatives from the insurance industry, the small business community, the private equity market and research think tanks following a meeting with Sarkozy. In the letter, insurance industry body Fédération Française des Sociétés d’Assurance (FFSA) has reportedly committed its members to increasing investments in non-listed companies from €14 billion to €20 billion by 2007.

The Financial Times said people close to negotiations between the French government and the insurance industry claimed that Sarkozy had threatened to impose the change on the industry in this year’s budget, unless it was agreed voluntarily.

If so, this would mark an about-turn from the government’s position last year. Then, a similar proposal from senator Philippe Adinot was waved through the Senate but then blocked by the government in the National Assembly after pressure from the FFSA, which said such a move would restrict insurers’ freedom of choice and force them to take more risks.

At the current time, French insurers have around €1,000 billion under management, of which the majority is invested in fixed income bonds and only around 1.4 percent in private equity. This compares with around four to five percent committed by their counterparts in the UK.

The move seems primarily designed to bolster the venture capital industry in France at a time when funds have found raising new capital extremely difficult. However, at the time of the proposal last year, a leading French funds of funds manager questioned whether the new money would find its way into buyout firms’ coffers rather than the technology companies for which it appears to be intended. It is not immediately apparent whether the proposal details any distinction between early and later stage investment.

The announcement comes just before Sarkozy steps down as finance minister to contest president Jacques Chirac for the leadership of the ruling UMP party. This is seen as a possible precursor to Sarkozy running for president in 2007, when Chrac’s current term ends.