Venture capital: 44% increase from EUR1.235 billion during the first half of 2021 to EUR1.780 billion during the first half of 2022.

Growth capital: 35% increase from EUR2.717 billion during the first half of 2021 to EUR3.666 billion during the first half of 2022.

Leveraged buyouts (LBOs): 12% increase from EUR6.501 billion during the first half of 2021 to EUR7.296 billion during the first half of 2022.

Type of business. PE investors look for mature businesses that may be facing ineffective leadership or seeking to raise funds to accelerate their internal and external growth. Their return on investment is lower as they are taken on less risk. Conversely, VC investors look for early-stage businesses with very high growth potential and therefore a higher potential return on investment (implying, however, a higher level of risk).

Control over the business. PE investors usually require a majority or a substantial minority stake in the company they are investing in, whereas VC investors usually only request a minority stake.

Exit strategy. PE investors often look to improve a business and then turn it around for a quick sale (that is, between three and four years). They are not interested in being involved in the business for a long period of time. VC investors are keen to be involved in the long-term growth of the company and to receive, in exchange, a substantial payout.

Insurance companies: EUR3.178 billion (up 124% year on year).

Pension funds: EUR2.512 billion (up 152% year on year).

Funds of funds: EUR2.446 billion (down 11% year on year).

Public sector/government agencies: EUR2.424 billion (up 266% year on year).

Individuals and family offices: EUR1.892 billion (up 14% year on year).

Sovereign funds: EUR1.672 billion (up 136% year on year).

Banks: EUR1.102 billion (down 1% year on year).

Industrials: EUR710 million (up 48% year on year).

Cash contributions to the original share capital or capital increases of certain small and medium-sized (SME) companies (as defined in the General Block Exemption Regulation (651/2014)), which have operated for less than seven years and carry out commercial, industrial or artisanal activity (financial and real estate activities are excluded).

Cash subscriptions in mutual funds investing in innovation (Fonds Commun de Placement dans l'Innovation) (FCPI) or local investment funds (Fonds d'Investissement de Proximité) (FIP), or similar funds located in an EU member state or in the European Economic Area (EEA).

EUR50,000 for single, widowed, or divorced taxpayers.

EUR100,000 for married taxpayers subject to joint taxation.

Shares held in stock savings plans (Plans d'Epargne en Actions) (PEA).

Retirement savings plans.

SME innovation accounts.

Employee savings plans (for example, a Plan d'Epargne Entreprise) (PEE), Plan d'Epargne Interentreprises (PEI) or Plan d'Epargne Collectif (PEC)).

Distributions of interest income and dividend income are taxed as "investment income."

Distributions of capital gains are taxed as capital gains realised by natural persons on the sale of shares.

The French executives hold carried interest shares issued by a French fund or a foreign investment structure established in the EEA and with the main purpose of investing, directly or indirectly, in shares of unlisted companies or instruments giving access to the capital of unlisted companies, to create value for stakeholders through their management of these investments (this purpose must appear in the setting-up documents).

The French executives are (or were, at the date of subscription for or acquisition of the relevant shares) employees or corporate representatives of the issuing investment fund itself or of a company providing management services to the fund and remunerated at arm's length for those services.

The French executives subscribe for or acquired their carried interest units/shares at market price.

The French executives receive market standard compensation for their employment/corporate representative status (which allowed them to subscribe for or acquire their carried interest units/shares).

The carried interest units/shares form a single category of units/shares.

The subscription price for the carried interest units/shares is at least 1% of the portion of the total amount of investment fund subscriptions of EUR1 billion or below; and 0.5% of the portion of the total amount of subscriptions exceeding EUR1 billion. This is mitigated to 0.25% in relation to certain investment vehicles investing mainly in unlisted companies meeting an innovation requirement, or unlisted SMEs, provided that the carried interest units/shares do not give rights to more than 20% of the net assets or proceeds of these investment vehicles.

The rights under the carried interest units/shares are not crystallised before the end of a five-year withholding period (from the creation date of the issuing fund, for French investment funds, or from the date of issuance/subscription/closing if not paid up for EEA investment funds).

Qualifies as a tax fund (fond fiscal) (this can apply to a fond professionnel de capital investissement (FPCI) or a société de libre partenariat (SLP) if they meet the conditions (see below)).

Is an FCPI (meaning at least 70% of its investment portfolio is made in certain EEA-based unlisted SMEs satisfying an innovation requirement).

Whose registered office is located in an EEA member state.

Subject to corporate income tax.

Carrying out commercial, industrial or artisanal activities.

Not traded on a French or foreign regulated stock market, or, if so, the companies must:

The unit holder commits, on the subscription date, to hold the qualifying fund's units for five years.

During this five-year holding period, the unit holder reinvests into the fund any distribution it made (whether drawn from capital gains, dividends or interests received by the fund).

The unit holder and the unit holder's family do not hold, directly or indirectly, more than 25% of the financial rights of a company whose shares are held by the fund, and have not done so during the five years before the subscription of the fund's units.

Social contributions at the rate of 17.2%.

Inclusion in the assessment of the French exceptional contribution on high incomes

Distributions drawn by the tax fund from the proceeds of asset sales or from capital gains realised by certain capital-risk entities in which the tax fund owns stakes (funds of tax fund), are deemed capital repayments and are not taxable up to the amount invested by the unit holder (and which has not yet been used through similar previous distributions). For unit holders who are not original fund subscribers, the distributions are deemed tax-free capital repayments up to the purchase price of their units. In relation to the excess amount, where the unit holder has invested in the distributing tax fund for at least two years, the long-term regime for capital gains, meaning that the excess is:

Capital gains from the sale of the tax fund units, or liquidation of the tax fund, benefit from the French long-term regime if the corporate investor has invested in the fund for at least five years. This regime provides:

The PE vehicle:

The management company (société de gestion), which is typically a simplified joint stock company (société par actions simplifiée) or a joint-stock company (société anonyme) supervised by the financial markets authority (Autorité des Marchés Financiers) (AMF).

Initial investment window of four to five years, to source the investments and complete the initial investment in the target companies.

An asset management period of five to eight years from the investment completion date.

A realisation period, during which PE fund seeks to dispose its investments.

The internal rate of return.

A total money multiple.

Certain VC funds are dedicated to specific funding rounds (for example, series A, B, or C investments or seed investments).

Certain VC funds are industry driven (either in the tech, food, or health industry).

Certain VC funds can be open-ended (evergreen funds), pursuing investment opportunities in series C and D over the long-term.

EUR100,000.

EUR500,000.

Be managed by a management company which is approved by the AMF or other EU regulator as a portfolio management company AIFM.

Appoint a depositary.

Retail PE investment funds (fonds commun de placement à risques) (FCPR).

Retail venture capital investment funds (FCPI) (see Question 4).

Retail local investment funds (FIP) (see Question 4).

The investment is carried out in France by a foreign investor. A foreign investor is either:

(Article R. 151-1, Monetary and Financial Code.)

If the regulated investment involves an investment fund, the management company is deemed to be the foreign investor.

The investment is qualified as a share deal, an asset deal, or a threshold crossing (that is, regulated investments).

The activity of the investment's target company falls into one of the categories of regulated sector/activity. French authorities have recently extended the scope of activities covered by the FDI rules. These now apply to activities likely to undermine public authority, public order, public security, or national defence interests, and encompass broad strategic sectors such as defence, cybersecurity, food safety, research and development, and biotechnologies.

Professional investors, as defined in the Markets in Financial Instruments Regulation (600/2014).

Individual investors committing to a minimum investment of EUR100,000.

Recently, investment opportunities in PE funds have emerged for non-professional individual investors, with a lower individual investment ticket. For example, Bpifrance has launched two retail funds aimed at non-professional individual investors: Bpifrance Entreprises 1, a fund aimed at individual investments amounting to EUR5,000; and Bpifrance Enterprises 2, with almost identical terms and conditions but with a lower individual investment amounting to EUR3,000.

FPCIs must invest at least 50% of their assets in:

FCPIs must invest at least 70% of their assets in:

SLPs (similar to FPCIs for tax purposes) must invest at least 50% of their assets in:

Mirroring the increase in the emphasis on environmental, social and governance (ESG) factors in investment decision-making, the Sustainable Finance Disclosure Regulation (2019/2088) (SFDR) establishes new extra-financial obligations for both financial and non-financial companies, aimed at helping them to understand, compare and monitor their sustainability characteristics through standardised sustainability disclosure obligations.

The SFDR provides for a framework to categorise private equity funds and their underlying financial products depending on their level of promotion of their environmental and social attributes under Articles 6, 8 and 9 of the SFDR; private equity funds falling under Article 6 of the SFDR face fewest requirements, while pre-contractual and reporting obligations (both quantitative and qualitative), proportionally increase for private equity funds falling under Article 8 or Article 9 of the SFDR.

In parallel, the Taxonomy Regulation (2020/852) (which applies to private equity funds falling under Article 8 or Article 9 of the SFDR) establishes an evolving set of rules adapted to climate change transition which define the criteria for considering whether an economic activity is sustainable and can be reported as such in the private equity fund's periodical extra-financial reports.

Governance. For example provisions for:

Investment of the team in the fund (specifying the amount of investment, and also vesting mechanisms).

Access to the deal flow of the PE in relation to a specific type/sector of investments

Preferential rights to co-investment (investment by limited partners in a particular transaction in parallel to, rather than through, the main fund).

A specific type of reporting, as certain corporate investors can be listed on financial markets and may need specific information regarding the activity of the PE fund, such as the investments that were made.

From the fund's perspective, the main advantage of bonds over preference shares is that the interest accruing on the bonds can be paid to the holder as it falls due, while a dividend payable on a preference share can only be paid if the portfolio company has profits available for distribution and the debt financing has been reimbursed.

From the manager's perspective, the main advantage of preference shares over bonds is that they allow the manager to retain a fair amount of the share capital and voting rights while still allowing the holding portfolio company (Newco) to benefit from the money from the investment.

Phase 1:

Phase 2:

Monetary and Financial Code.

Commercial Code.

General Tax Code.

General Regulations of the AMF.

Transaction kick-off:

Pre-signing/signing:

Corporate documents on closing date:

Agreements to be entered into on closing date:

Closing deliveries:

Other documents as required for financing and tax purposes.

A price adjustment mechanism, which protects the buyer from any change in the target company's value between signing and closing. Rather than a "locked box" price mechanism, this structure ensures the buyer pays only for what it gets.

Sellers' representations and warranties. The buyer can usually negotiate general representations and warranties with sellers on a primary buyout; however, it usually only obtains fundamental representations and warranties from the sellers on secondary management buyouts (but can take out a specific representations and warranties insurance policy).

A material adverse change (MAC) clause can be included, under which either party can renegotiate the transaction if a serious event arises and compromises the value of the transaction negotiated between the parties. The use of MAC clauses is unusual in the French PE market, and they usually exclude any changes directly or indirectly caused by a pandemic or by the current conflict in Ukraine.

Must behave prudently, diligently and in good faith, or be liable to the company or the company's shareholders.

Has a duty of loyalty towards the company's shareholders.

Principle of good conduct (Article L.214-24-3, Monetary and Financial Code).

Duty of transparency towards the AIF's subscribers, requiring the publication by the management company of certain periodic reports under the provisions of the Monetary and Financial Code (in particular, Articles L.214-24-62 and D.214-33).

Limited in duration.

Limited geographically.

Necessary to protect the legitimate interests of the company.

Working time arrangements: the executive manager benefits from annual leave but is not subject to any working time limits.

Contractual termination of the employment contract: the executive manager can negotiate a contractual financial indemnification for their benefit in the case of dismissal.

Contractual retirement clause: the executive manager can negotiate the implementation of a retirement plan with an external pensions organisation/entity.

Fixed and variable remuneration clause and benefits in kind clause (for example, car and accommodation).

Mobility clause: this enables the employer to modify the workplace of its employee within a perimeter determined in advance by the parties.

Non-competition clause: to be valid, a non-competition clause must not be drafted in a way that completely precludes the executive manager from performing any activities during the non-competition period, and must be:

Clients and prospects non-solicitation clause: this is similar to a non-compete clause (and must therefore be financially compensated (see above)).

Employees' non-solicitation clause: this precludes the executive manager from hiring any other employee of the group portfolio companies after leaving.

Typically, the right to appoint at least one person to the Newco supervisory board.

The right for a PE fund representative to observe Newco supervisory board meetings.

A requirement that Newco's supervisory board is not quorate without the attendance of the fund-appointed supervisory board member(s).

The acquisition or disposal of assets.

The issue of shares or options.

The redemption of shares.

Changes to constitutional documents.

Increases of indebtedness.

Charges over its valuable assets.

Pledges over the shares in the portfolio company held by the acquisition vehicle.

Priority creditors (including super privilege of employee wages).

Fees for the liquidation proceedings.

Providers of new money as part of a workout agreement from previous conciliation proceedings.

Lenders' liens on real estate and mortgages according to their rank.

Wages which do not constitute employee priority claims (see above).

Providers of post money, given with the aim of ensuring continued activity for the duration of the liquidation proceedings or until execution of a safeguard/rehabilitation plan decided by the court.

Other post-petition claims arising from continuation of contracts with creditors who agreed to a deferred payment.

Wages becoming due during the observation period (a period in insolvency safeguard proceedings of up to six months to assess the company's financial position) and until the effective redundancy of employees.

Other post-petition claims and prior-petition claims for which payment is authorised.

Direct tax contribution.

Creditors secured by pledges, and lessors.

Indirect tax contributions.

Other unsecured creditors (including shareholders).

Free shares. The equity incentive arrangement most commonly used is the allocation of free Newco shares to the managers; these can be either ordinary shares or preferred (ratchet) shares. Free shares are particularly relevant for primary leveraged buyouts or for second or third cycle managers (that is, for operating managers as opposed to senior managers) in secondary leveraged buyouts, as they cannot represent more than 10% of the issuer's outstanding capital (Article L.225-197-1, Commercial Code) and, as a consequence, 10% of the exit proceeds. Free shares may not be efficient for managers residing outside France, as the jurisdiction in which they are resident may tax the allocation of free shares as a fringe benefit arising on their allocation.

Sweet equity. Under a sweet equity mechanism, the Newco managers invest in Newco shares; the price they pay on subscription generally sets the amount the financial investors must subscribe for equity (or ordinary) shares, and the balance of the investor's investment is made through preference shares and/or loan notes, possible alongside third-party debt finance. Under this mechanism, the return achieved by the managers can be significantly higher than the one achieved by the financial investors.

Performance ratchet. Preferred shares linked to a performance ratchet generally provide a return exceeding that of the ordinary shares. The managers subscribe to preferred shares at a price based on an assessment report prepared by a third-party expert. As a result, preferred (ratchet) shares provide maximum flexibility.

Founder stock options. Certain newly or recently created (registered for less than 15 years and are not the result of mergers, restructurings, extensions or takeovers of pre-existing activities) unlisted or small-capitalisation (less than EU150,000) companies can grant specific warrants to their employees or certain corporate representatives or board members specific warrants (bons de souscription de parts de créateur d'entreprise) (BSPCE). These warrants allow the beneficiaries to subscribe (on the BSPCEs' allocation date) to a capital increase of the issuing company at a predetermined price. The shares can be ordinary or preferred shares. A grant of BSPCEs provides both legal certainty (beneficiaries benefit from a legally-framed tax and social regime) and flexibility (BSPCEs' conditions of grant and exercise are not mandated by law and so can be contractually determined). However, as the allocation of BSPCEs is a contract of a personal nature, they are not assignable.

Companies incorporated in France with more than 500 employees and an annual turnover of more than EUR100 million.

Companies belonging to a group with more than 500 employees whose parent company's registered office is located in France and has an annual turnover of more than EUR100 million.

Advises companies to carry out a corruption and bribery risk assessment of the target company and to assess its compliance policy.

Recommends that companies, at each stage of the transaction, carry out anti-corruption audits of the target company.

Have income over the preceding two tax years which is at least 75% passive income (that is, income derived from investments).

Are engaged in cross-border activity.

Have outsourced within the preceding two tax years the management of their day-to-day operations and decision-making on significant functions.

Not benefit from tax relief on any EU directive or any applicable double tax treaty.

Be taxed at the level of its stakeholders rather than retaining its own legal identity.

The court held that the gains arising from the disposal, on exit, of a financial instrument can be treated as ordinary income when:

The source of the capital gains derives from the taxpayer's exercise of an employee or management position.

The conditions in which the gains were realised mean that those gains should be regarded as consideration for the manager or employee's position rather than a gain realised by the seller in its capacity as investor (Conseil d'État, 3ème, 8ème, 9ème et 10ème chambres réunies, 13/07/2021, 428506).

Although it is not easy to draw definitive conclusions at this stage, the decisions and the opinion of the attorney general:

Suggest there should be reconsideration, for the future, of leavers' mechanisms and provisions in shareholders' agreements imposing contractual obligations on the taxpayer in their capacity as a manager (lock-up, exclusivity, and non-compete) rather than in their capacity as a shareholder.

Emphasise that statutory regimes, such as "free shares" plans and/or "stock-option" plans, should be favoured over ad hoc instruments, especially when they are only for the benefit of managers (such as ratchet shares).