Last call for transparency

The final recommendations on disclosure and transparency in private equity in the UK have been published to mixed reception. Sir David Walker's recommendations on reforms in private equity have largely received the backing of the industry, but not of politicians and the unions, who have vigorously criticized the reforms for not going far enough.

Walker presented his reforms to a skeptical UK Treasury Select Committee in December, saying that private equity firms would comply or face the committee and parliament's ?wrath.? It remains unclear, however, whether compliance with the recommendations set forth in the Walker Report will allow the industry to avoid the dreaded government regulation of the industry.

The reforms have received wide public backing by industry figures. In private, more than half of all European limited partners back the changes, according to secondaries firm Coller Capital's Private Equity Barometer. Despite general consensus in the affirmative, there remains a small constituency of skeptical and vocal opponents of the reforms, such as PPM Capital's Neil MacDougall.

The impetus of the reforms has come on the back of what has been seen as controversial takeovers and actions by private equity firms in the UK. The buyout of UK motoring company AA by European firms CVC Capital Partners and Permira sparked criticism and distrust of the private equity industry. Permira especially attracted strong (and eccentric) criticism from the GMB union over job losses at the AA during the two buyout firms' stewardship of the company.

As private equity firms targeted increasingly mainstream businesses, such as Kohlberg Kravis Roberts' £11.1 billion ($22.6 billion; €15.4 billion) takeover of UK pharmacy Alliance Boots in the largest deal in European history and attempts by a CVC consortium to buy UK supermarket Sainsbury's, the public also added to the growing chorus of criticism.

None have been so vocal in their criticism of the Walker reforms at addressing their failure to truly change the industry as Treasury Select Committee chairman John McFall. He said that the voluntary code of conduct was ?inadequate? and ?if the aim is to keep the barbarians from the gates, they have failed.?

?Publicly-listed companies have to disclose issues and I don't see why Sir David says [private equity firms] should just go half-way. If they want to ensure they get public confidence and want to be accepted as an industry then they should go that bit further and disclose the same as PLCs,? McFall told UK newspaper Daily Telegraph. McFall suggested a ?tightening up? of the voluntary aspect of Walker's code of conduct, saying that the signing up to guidelines should be compulsory for all members of the industry body British Private Equity and Venture Capital Association (BVCA).

Walker responded by calling McFall a ?totally inconsistent? critic of the report. He said McFall's demands for public company-like disclosure without an increase in regulation or primary legislation was not realistic. UK mid-market firm Duke Street Capital's Peter Taylor told PEI Manager that winning over some critics such as unions was ?probably not a fair test? of the reforms success. But he said: ?It is a chance to win back support private equity lost earlier this year through poor media communication.?

BVCA phoenix
One winner that has emerged from the public squabbling is the BVCA. The Walker Report not only gives the industry body a central data gathering role, but also encourages it to appoint an independent monitoring group to check compliance with the proposals. The BVCA will be able to expel members that do not comply with the proposals and do not undertake early remedial action.

Newly appointed chief executive Simon Walker (no relation to Sir David Walker) has embraced the proposals as tough but necessary given the increased visibility of private equity. His emphasis on the BVCA caps off a subtle change the body has undertaken since a veritable mauling in front of the Treasury Select Committee in July, which led to then chief executive Peter Linthwaite's resignation from the organization. BVCA members had briefed against its handling of the confrontation, claiming the body had gone into the meeting unprepared and was made to look naive.

The industry has high hopes in Walker, who came to the post from news agency Reuters as senior advisor to the chief executive. He had also previously worked as communications secretary to the British Queen and as director of corporate affairs at UK airline British Airways. So far executives have been supportive of how he has comported himself since taking on possibly his most difficult role so far.

The seeming transformation of the organization under the leadership of Simon Walker has lent hope that it will be able to implement David Walker's recommendations in such a way that it will be able to convince a skeptical public, political class and media of the industry's merits. David Walker had considered splitting the BVCA in two to provide for a larger buyout arm and a venture capital body, but concluded it would be easier to implement the necessary reforms with a single body. The conclusion came with a warning, however, that the BVCA must ?raise its game? to succeed.

To aid the transformational process David Walker's friend Sir Mike Rake, chairman of UK telecoms group BT, will chair the monitoring group overseeing the reforms. Walker has warned that Rake would be ?fiercely independent.? Rake will be joined by two members of the industry and two independents on the board to ensure the body has a majority non-private equity structure.

Overzealous application?
Initial estimates by the Walker Working Group suggested that approximately 65 firms would be subject to the proposals due to limiting criteria to stop the reforms creeping beyond the UK. Walker told the Treasury Select Committee that once outlying firms which had not yet joined the BVCA were recruited, this number would rise to around 80. Walker's old firm, Morgan Stanley, of which he was chairman, is one such company yet to join the trade body, despite having a private equity arm.

Yet there is an impetus behind the Walker reforms to take them a lot further. Duke Street Capital will implement the reforms across the majority of its portfolio despite having few or no companies that will fall under the Walker criteria; other mid-market firms are also considering similar moves. One of Europe's largest buyout houses has also said it is considering implementing the recommendations in the report across its entire European portfolio, while others privately talk about going beyond the reforms in unspecified ways. In contrast some think straightforward compliance with the reforms as they stand is the fairest expectation of the industry. This stand-off within the industry has the potential to bring out numerous cracks in the newly proposed reforms.

Other national trade bodies are said to be considering implementing the reforms in their jurisdictions, but it remains to be seen if the momentum they can generate will spread internationally. A key test will be whether the reforms can appease the political authorities. Private equity firms in the UK generally view compliance with the Walker Report as a must, given the public relations bashing the industry has experienced over the last year. Whether this will be enough to suppress the hostility the industry has generated in the recent past, however, is less clear.

Walker's words
Below is a selection of sir David Walker's recommendations from his report on disclosure and transparency: