Carried interest debate

French private equity is on the defensive again after the threat of a heavy-handed bout of government legislation. Affected this time is the carried interest that GPs generate after the sale of a portfolio company and positive returns.

Charles de Courson, budget specialist of the Nouveau Centre, is seeking to amend the Finances 2010 law to allow for the taxation of carried interest at the same level as salary on the grounds of tax equality. The move would effectively put carried interest in the same bracket as bonuses.

The move comes shortly after the implementation of a parliamentary initiative drawn up by Jean Arthuis, the president of the Senate's finance commission, regarding carried interest. The law originated from concern expressed about GPs who, through increasingly ambitious leverage structures, were able to create substantial value in as little as two years at the expense of the portfolio companies' staff and management.

The motion was debated between politicians and private equity investors, resulting in a compatible solution being drawn up. "Why suggest amendments to push a piece of legislation that has just passed after long deliberation?" asks Gonzague de Blignieres, president of Barclays Private Equity.

The French private equity world has already branded the move as an ill thought out witch-hunt following the media coverage and demonisation of banker bonuses. "Carried interest is nothing like a bonus on legal or economic grounds," asserts de Blignieres. "It is frankly unethical to tax something which already carries risk."

Indeed, GPs presently have to invest roughly 1% of thier fund with their own money. If and when a profit is generated from the sale of a portfolio company, GPs are the last to benefit since this carried interest only comes after investors have recouped their investments, and then some. "Carried interest is effectively a long-term investment with a risk and an alignment of the interest of investors and private equity houses," de Blignieres says.

Carried interest is currently taxed in the same way as capital gains, which currently stands at 30.1%, however the new proposition would see that go to more than 50%.

An increase in the taxation of carried interest would bring about damaging effects on private equity as a discipline in France, directly and negatively impacting team motivation and retention. Should a flight of talent from the asset class ensue, LPs will lose the stability of teams they seek out.

"There is a real risk of such legislation driving some private equity houses out of France," says de Blignieres, before suggesting that the authorities would be better off looking at the regulation of stock options of listed companies, which does not carry any risk.

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• France