“There's a saying in France that roughly translates as: 'if you want to stay happy, stay hidden'.” So says a leading Paris-based private equity professional when asked whether the demands for transparency that have been the subject of so much debate in the UK have spread to the other side of the Channel. In this professional's view, avoiding entering into debates about transparency is the best way to ensure that it never becomes an issue.
Certainly – and, some would say, ironically – there does not appear to have been anything like the same criticism of private equity in France that has erupted in the Anglo- Saxon markets of the US and UK. 3i's Bruno Deschamps, who has lived in all three of these countries plus Germany, hands private equity body l'AFIC much of the credit for this: “They've done a very good job over the last ten years of discussing, debating and lobbying and doing all they can to ensure that private equity people are seen as good citizens who create jobs.”
Other professionals point out that French management teams have done the asset class's reputation a big favour by agreeing to put in place employee savings schemes at the time of deals being struck. An initial payment equivalent to around two to three months' salary is typically committed at the outset (normally to French employees only). This appears to have neutralised the resentment that might have otherwise surfaced when private equity firms have adopted a cost-cutting approach. “French factories have been closed and work outsourced to Asia, but no-one has been striking on the streets,” says one source.
However, others see general criticism and demands for greater transparency as something waiting to happen rather than being a phenomenon from which the country is immune. Says Cedric Berard, vice president in the Paris office of investment banking and financial advisory group Duff & Phelps: “As much as in the US and other countries, there is a risk of a leveraged buyout firm going under. As a function of the size and intensity of such an event, it is likely the public, as much as the PE players themselves, would consider the benefits of implementing something like the [UK's] Walker Report.”
Berard is of the view that transparency may be more of an issue in France than in those countries where an alleged lack of it has already caused problems. He points to GP reporting in France, which is often cost-based. “The concept of fair value is fundamental in reducing the information asymmetry between an investor and a GP. The use of a cost-based valuation reduces the perception of transparency and, as such, increases the cost of capital. It is interesting to note that fair value reporting on a quarterly basis is now required by a number of large Anglo-Saxon LPs.”
Berard bills 2008 as “the year for being transparent and up front about your valuation policies and governance”. It's a clarion call that the French private equity market may need to hear, in spite of the calmness with which their activities appear to have been viewed to date.