This year may be drawing to a close, but drama continues to unfold in the ongoing French fiscal soap opera.
In the latest twist, the country's Senate – although controlled by the ruling Socialist party – dealt a blow to one of the government's most polarising reforms: taxing the windfall generated in the sale of a business as income rather than capital gains. The measure has understandably been sending shivers down the spines of entrepreneurs, but also buyout houses wary of its impact on primary dealflow, for several months now.
In mid-November, an unlikely alliance of right, centre-right and communist parties in the Senate voted against the reform. A spontaneous, high-profile and tenacious alliance of serial entrepreneurs (self-dubbed "Les Pigeons", or "Fall Guys") had already cornered the government into making several concessions, namely lowering the tax rate for longer holding periods and eventually excluding business founders from the scheme. The 2013 budget draft will now head back to the Socialist-controlled parliament, which will have the final say on the exit proceeds issue.
On the one hand, these latest developments might vindicate the claim that, election-winning rhetoric aside, the government wouldn't be able – let alone willing – to implement a fiscal framework designed to strangle business creation and M&A activity. Indeed, the initial prospect of all exit proceeds being taxed at more than 65% and of carried interest being hit by rates upwards of 95% have been progressively put to rest.
But the whole saga nevertheless highlights a quintessentially Gallic trait: a highly unstable fiscal framework leaving investors incapable of making long-term decisions. The reforms may eventually lose a lot of their bite, but the damage is already done to a large extent as far as private equity activity is concerned: according to unquote" data, French dealflow is at a 14-year low in 2012 with barely a month left in the year. Granted, poor visibility on target prospects and enduring mismatches between vendors and buyers played their part, but many practitioners point at the fiscal sword of Damocles as a strong deterrent to deal-making from Q2 onwards.
Worse still, the protracted drama hints at a near total lack of understanding and communication between the French private equity industry and political decision makers, despite a raft of alarming statements from trade body AFIC. "The State doesn't understand a thing about private equity, it is way too complicated for them," bemoans the president of a local buyout house. "And since we are not a force to be reckoned with in their eyes, they would have no problem with us disappearing completely."
Local deal-doers will no doubt be eager to put a rather bleak 2012 behind them, and it remains to be seen how far reaching the impact of the most potentially damaging reform – carried interest being taxed as income – will be for the French GP base. But the events of the past year serve as a reminder that, despite its maturity, the local private equity market is still doomed to be shaped by political debate rather than the other way around.
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Date: 05 Nov 2015
Location: Milan, Italy
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Simon Millerchip rejoins OpCapita as CFO and head of compliance