Colony Capital, the $27 billion U.S. investment fund attracting controversy in France over its involvement in Carrefour and Accor, will invest up to $2 billion in Europe on a bet the business climate will soon improve.
Colony's chief executive Thomas Barrack said the firm would allocate $1.3 to $2billion investment in France, Italy and Spain over the next eighteen months, aiming to fill a funding gap left by banks which must now comply with new Basel III regulation demanding higher levels of capital.
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Barrack said the business community's anxiety over Socialist President Francois Hollande reminded him of unfounded worry about Francois Mitterrand's initial moves to nationalize banks - ultimately followed by shift to the center after the French franc came under heavy selling pressure.
Hollande is perceived as anti-business because of a widely publicized campaign speech in which he referred to finance as "the enemy," his introduction of tax rules that have cut profits in private equity deals and his Production Minister Arnaud Montebourg who just this week made headlines for blocking U.S.-based web portal Yahoo's proposed acquisition of Internet video site Dailymotion.
"Our belief is that Hollande will be forced to come back toward the center and when that happens the payoff for firms that are prepared to recapitalize healthy companies in need of capital ...will be significant," Barrack told Reuters.
"That wall of hundreds of billions of dollars of financing, or recapitalization...at a time when everybody is seeing negative growth, cost reductions, consumer pullback...will be a great opportunity," he said in a phone interview.
"We think that's going to be the large contrarian play."
Many other investment firms, from CVC to Rothschild are also looking for such "shadow banking" opportunities in Europe as big lenders pull back.
Roughly 20 percent of Colony's holdings are in Europe, with 60 percent in the U.S., where it invested in almost $20 billion of underperforming debt after the financial crisis.
Barrack, a onetime Reagan administration official, called Socialist Hollande "a brilliant man sculpted out of the fabric of the French establishment which is a necessary element to operate and lead the French system."
He saw upside in Hollande's moves to raise capital gains taxes and scale back deductions on interest payments: "The apparent de-emphasis on entrepreneurs will increase the opportunity for contrarians because a lot of entrepreneurs will be driven away."
Colony Capital - which says its average investment in France is a decade long - is a key stakeholder in French hotel group Accor and in retailer Carrefour .
Its close involvement in both firms has been blamed by unions and some local investors for fostering management upheaval and short-term thinking.
Colony invested 1 billion euros in Accor in 2005 and together with French private equity fund Eurazeo now controls 21.4 percent of the group and four board seats. Colony directly owns around 11 pct of Accor's capital.
Barrack himself sits on Accor's board while Colony CEO for Europe Sebastien Bazin last week became vice-chairman of the board following a controversial shakeup at Europe's largest hotel group.
Barrack defended Accor's recent ousting of its CEO, saying Denis Hennequin had to answer for weak results and subpar stock performance.
"It relates to very poor results against Accor's peers over the same time period and the failure to achieve the goals within the time frame that his board of directors had mandated," he said.
"As CEO you take applause for the cast when it is available...you accept the firm hand of accountability along with that responsibility when things are not working."
Colony, which masterminded the separation of Accor from its vouchers business Edenred in 2010 and the latter's successful listing, is sticking with the investment, Barrack said. He said a key challenge for Accor now is to respond to competition from online booking agencies like Expedia.
Colony has also been skewered by some critics for ousting a procession of top executives at Carrefour and pushing an abortive property spin-off.
Colony and France's richest man Bernard Arnault own 15.62 percent of the capital and 21.73 percent of the voting rights of Carrefour via investment vehicle Blue Capital.
Last year, Blue Capital recruited retail veteran Georges Plassat to spearhead a turnaround at the world's No. 2 retailer after Wal-Mart Corp . The plan has been so far well-received and has propped up Carrefour's share price by 54 percent since mid-July, although the stock is still worth just half of the average price Colony paid initially.
Colony directly owns around 7 percent of Carrefour and Barrack said its investment was long term.
"We are here for the duration. We have a world-class CEO. We think it's really undervalued and we are really happy to stay with it," Barrack said.
(Editing by Sophie Walker)