Facebook activism rarely comes to anything more than a few “likes” and the odd misspelt comment. For every Kony 2012, there are thousands of memes and calls to action lost and forgotten before they've had a chance to motivate the masses. But in France, a nation unafraid of public protesting, the self-styled “les pigeons”, or fallguys, have pulled off the near impossible – forcing Hollande's administration to backtrack on a punitive tax proposal. But private equity shouldn't hold its breath just yet.
A group of intrepid entrepreneurs, les pigeons have clocked up nearly 70,000 likes for their Facebook group. Their mission: to rally against government budget proposals to hike capital gains tax (CGT) from the current 32 per cent to as much as 63.5 per cent, effectively treating capital gains as income. Germany, by contrast, charges 26.4 per cent CGT; the UK 28 per cent.
Hollande's quandary is that France's start-ups don't fit the bill. Taxing fat cats and financiers is one thing, but making life harder for budding, and often struggling, business owners is quite another. George Bush Jr may have gaffed “the problem with the French is they don't have a word for 'entrepreneur'”, but if Hollande were to have his way they may not need one.
Since les pigeons went on the Facebook offensive a fortnight ago, finance minister Pierre Moscovici has assured group leaders that the budget will be amended to favour start-ups, saying that the principle was to tax “unearned income” and not risk. The draft will go back under review and it's likely that Moscovici will make concessions for new business. Bravo to les pigeons for standing up for themselves and protecting their nest. Will the buyout fraternity be so lucky? Hardly.
Worse still, carried interest is fast looking like it will be taxed as income and not capital gains. That would mean as much as 75 per cent of GPs' profits going towards Hollande's €30bn tax harvest. It's difficult to argue that carry should be treated as anything other than income, and you may find monied buyout execs are prepared to admit as much; you'll struggle to find anyone who thinks giving up three quarters of their earnings is fair cop.
But even if, and it's a big 'if', the eventual budget does resemble the proposal, the media hyperbole calling a private equity exodus still doesn't add up – and for a number of reasons. France is the EU's highest taxer, yet has one of the biggest private equity markets on the continent. Sure, doubling the levy on carry is a big, big jump, but budget minister Jerome Cahuzac has already allayed fears by saying that taxes are likely to fall again in just two years' time. LPs already anticipate longer holding periods – it's conceivable they'll just get longer. Of course, the majority of GPs have their investors' best interests at heart, but even where they sell up promptly, it's possible partners will take deferred payouts. Private equity is long term - what's another two years?
Where GPs aren't busy contriving crafty workarounds, there may be unforeseen benefits that come with what is ostensibly an industry-stopper. Secondary buyouts are as rife in France as anywhere. When it comes time for one firm to flip to the next, management teams will be dissuaded from taking cash off the table in that two-year window. More skin in the game means bigger incentives and, in theory at least, better run companies.
And if a short-term tax millstone does cause some GPs to rethink their careers, France has one of the most overcrowded private equity markets going. A cull is overdue.