Consolidation concerns

There has been a lot of debate about the requirement for European private equity firms to consolidate their accounts. What are the main problems that it presents for a firm like yours?
Consolidation of investee companies into the GP or manager is an issue that has caused much consternation in the private equity world, arising out of a rather simplistic starting point that all companies ought to be consolidated by someone. The problems this would cause, if some of the mooted changes ever come to pass, are threefold. First, it is purely practical: trying to consolidate numerous sets of accounts from companies with non-coterminous year-ends and different accounting polices will require additional headcount – and therefore costs – for both the PE house and the investee companies themselves, many of whom would not be geared up to comply with the much shorter reporting timetables required by, for example, a UK bank. There is also a conceptual issue: my understanding is the aim of IFRS (International Financial Reporting Standards) was to produce a consistent set of accounts to aid the understanding of the reader. By consolidating assets that are, ultimately, held for re-sale would give at best meaningless and, at worst, misleading results. Finally, the reputational factor is also of concern: there would be a greater risk that the activities of the investee company would be linked in some way with the activities of the parent.

If no way of avoiding consolidation is found, what would you expect its effects to be on the future of captive private equity operations?
If consolidation does become a requirement, it would cause many organizations to look closely at the implications of keeping private equity operations in-house rather than investing through independent managers. For an organization like Barclays, there would be a number of areas likely to cause concern: the perceived increase in reputational risk; additional billions of debt added to the balance sheet; tens of thousands of additional employees; implications on regulatory capital requirements. Any one of these may ultimately prove unpalatable to the parent company.

Aside from consolidation, what are the other most challenging operational issues facing you today?
As ever, one of the most challenging issues is tax structuring of our transactions. It can be difficult ensuring that we continue to use the optimum structures when the rules seem to change with little warning or guidance, for instance transfer pricing rules or where HMRC (Her Majesty's Revenue and Customs) appear to take a different position to that previously agreed, such as the recent challenge to the provisions of the MOU on management equity.

What have been the main ?back office? changes that you've overseen during your time at Barclays PE?
Since I joined Barclays PE in 2001, the whole nature of the organization and, hence the back office, has changed fundamentally. Up until that point, BPE invested proprietary funds with a single co-investor, with whom we agreed reporting requirements up front. Following the raising of the Barclays Private Equity European Fund in 2002, and the introduction of many more investors into a far more complex structure, reporting requirements have increased significantly, bringing with it the need for far more automation. After an initial sharp intake of breath, we were keen supporters of the introduction of BVCA (British Venture Capital Association) and subsequently international valuation guidelines, and the EVCA (European Venture Capital Association) reporting guidelines, which have helped give us the framework to provide a more professional service to our clients.