France warms to sovereign wealth

France warms to sovereign wealth

By Ben Hall in Paris

Published: May 22 2008 19:05 | Last updated: May 22 2008 19:05

France does not need special rules to control foreign sovereign wealth funds and should do more to attract their money, according to an official report.

Thursday’s finance ministry study recommended that France adopt the UK view that sovereign wealth funds be treated like any investor so long as they observe the same rules as commercially owned businesses.

The growing financial muscle of sovereign wealth funds, particularly newcomers from China and Russia, has triggered alarm in political circles in France, as elsewhere in Europe and the US.

But in contrast to Germany, which is drawing up a law aimed at vetting investments by state-backed funds, the French government should not discriminate between investors, the report said.

In return for France’s warm welcome, it said, overseas funds should be more open about their investment criteria, the influence of governments on their investment strategies, and how they regard their role as shareholders.

“This is not about new rules,” said Alain Dema­rolles, a French financier based in London who wrote the report. “But I would say that if an investor wants to be accepted, he must be well understood.”

Countries with sovereign wealth funds that wanted to invest in France should in turn be open to French investors, Mr Demarolles said, although this meant showing “movement in the right direction” rather than identical rules.

In January President Nicolas Sarkozy, said: “Faced with sovereign funds that do not simply follow economic logic, there is no question of France standing aside without a response.” He would use the state-owned Caisse de Dépôts et Consignations, arguably the world’s first sovereign wealth fund, established in 1816, to “defend and promote the nation’s vital economic interests”.

France has procedures for vetting foreign investors and has drawn up 11 “strategic sectors” where foreign takeovers may be blocked. The government also has the means to apply intense political pressure to deter unwelcome overseas buyers.

Mr Demarolles said that France’s “biggest problem” was the perception of reluctance toward foreign investment, whereas in fact it was one of the more open eurozone economies.

Some 46 per cent of shares in the CAC 40 leading companies are held by foreign groups, according the 2006 figures, the most recent available.

France’s economy stood to benefit from long-term investment from sovereign wealth funds because it lacked institutional investors, Mr Demarolles said.

It is a view shared by some of the leaders of France’s largest companies. Christophe de Margerie, chief executive of Total, said recently he was wooing sovereign wealth funds to take a combined stake of up to 10 per cent in the oil group.

The call for France to be more open to sovereign wealth funds echoes a report last week from the prime minister’s council of economic advisers, which said private equity was “essential for French capitalism”.

Private equity groups’ capital and management expertise could help address one of the biggest weaknesses of the French economy – the difficulty of getting small companies to grow. But private equity needed to be more socially acceptable in order to spread.