Comparison Between FCR and EuVECA Funds (Part I)

Sector figures, comparison, and key insights to better understand these funds

On January 22nd, our Management Companies, Investment Funds, and Financial Regulation department organized an in-person breakfast at the Across Legal offices in Barcelona. The event was attended by numerous professionals from the private equity sector, creating an ideal space to exchange knowledge, opinions, and address questions. Today, we want to share some of the main conclusions from the detailed analysis we conducted on Private Equity Funds (FCR) and European Private Equity Funds (EuVECA Funds).

FCRs are closed-end alternative investment funds (AIFs) regulated by Spanish Law 22/2014, while EuVECAs are also closed-end AIFs but regulated by a European regulation that directly applies to EU member states, namely Regulation 345/2013.

In terms of size, FCRs typically reach €316,000,000, while EuVECAs reach €104,000,000. For EuVECAs, this figure appears to reflect that the 2018 amendment to Regulation 345/2013, aimed at expanding the use and size of these funds, has been effective, as their average size in 2018 was approximately €60,000,000.

Regarding the most common investment strategies for these funds (or asset classes), the main asset class for FCRs is private equity, followed by venture capital, fund-of-funds, infrastructure, multi-strategy, and real estate. Other strategies, such as debt, are very marginal. For EuVECAs, the primary asset class is venture capital, representing over 70% of their investment strategies, followed by private equity targeting SMEs with a maximum of 499 employees.

Investment Strategies: Where Are the Funds Allocated?

Regarding admissible companies, which are the invested companies that count toward the mandatory investment ratio of the funds, we found that FCRs must invest in the following types of companies:

1. Non-real estate, non-financial, non-listed companies.
2. SMEs listed on specialized markets.
3. Companies with more than 50% of assets in real estate intended for economic activities.
4. Non-financial listed companies that are delisted within 12 months of the investment.
5. Other private equity entities (both Spanish and foreign, meeting certain requirements).
6. Fintech companies.

In turn, EuVECAs must primarily invest in SMEs but can also invest in other EuVECAs, including:

1. Non-listed SMEs with fewer than 499 employees.
2. Listed SMEs, provided their listing value is under €200,000,000.
3. EuVECAs (in this case, EuVECAs can only invest in other EuVECAs, unlike FCRs, as mentioned above).

Permitted Investment Instruments

Another relevant aspect to consider is that FCRs and EuVECAs cannot invest through just any instrument. They must use specific instruments to comply with the mandatory ratio. Consequently, for the admissible companies mentioned above, the investment must be carried out as follows:

For FCRs, the permitted instruments are:

1. Shares, participations, and other instruments that may grant the right to acquire shares or participations (including participations in admissible funds).
2. Participating loans whose profitability is entirely tied to the company’s results.
3. Other participating loans not fully linked to the company’s results, but in this case with a maximum threshold of 30% of the fund’s computable assets.
4. Non-originating debt instruments such as invoices, loans, credits, and other commercial effects, provided the FCR already holds an investment in capital or a participating loan, and in this case, with a maximum threshold of 20% of computable assets.

For EuVECAs, the permitted instruments are:

1. Shares, participations, and other quasi-equity instruments (including participations in other EuVECAs).
2. All types of loans, both secured and unsecured, but with a maximum threshold of 30% of the fund’s contributions and uncalled committed capital.

Regarding the mandatory investment ratio, 60% of an FCR’s computable assets must be invested in the admissible companies listed above, whereas for EuVECAs, this ratio rises to 70%. Additionally, FCRs are subject to diversification rules, meaning an FCR cannot invest more than 25% of the fund’s investable assets in the same company or more than 35% in the same group. In contrast, EuVECAs are not subject to any diversification rules.

Don’t miss our next article, where we will dive deeper into the key differences between these two types of investments, their marketing regimes, the use of financial leverage, as well as the main conclusions and investment strategies. An analysis that will leave no doubt about these key tools for private equity.