Transparency trailblazer

A few months is a long time in private equity. When the British Private Equity and Venture Capital Association launched a working group in March this year to look at how the asset class might become more transparent, it was against generally benign background noise created by just the odd murmur of discontent. By the time the group issued its recommendations in July, the initiative had become less an academic exercise and more a potential lifeline for UK private equity professionals desperate to defend themselves against accusations by the union, political and media ranks, of unfettered greed, rampant self-interest and inexplicable secrecy.
The last accusation at least may be a little harder to make in light of what has become known as the Walker Report, named after the report’s author, Sir David Walker, a City grandee and former chairman of Morgan Stanley. The report focuses on three areas: annual reporting by large portfolio companies, annual reporting by GPs and co-ordination of industry-wide performance data. Walker said there was “no silver bullet.” Instead, the report offers a set of guidelines for further consultation. Among the key suggestions were:
• Better portfolio company disclosure: Large portfolio companies to publish annual reports within four months of their financial year-end, rather than the nine months required by Companies House. Annual reports should outline the composition of entire board, details of the level and structure of debt, and discuss the company’s values and “role in the wider community.” But the Walker report did not recommend moves to public companystyle reporting, saying this would be “an incubus that need not and should not be imposed on private equity.”
• Appointment of outside directors: The report stopped short of recommending the appointment of independent non-executive directors to the board of portfolio companies, suggesting this was not required by the private equity model. But it did concede that firms may look to appoint outside directors, albeit dependent, for the sake of “constructive tension” on the board, particularly with respect to the firm’s audit committee.
• GP interaction with stakeholders: All GPs to publish an annual report on their website that includes details of senior management, an explicit commitment to transparency principles and a description of their philosophy regarding employee relations and corporate and social responsibility.
• Better communication: Firms to publish performance data that details the extent to which valuation increases can be attributed to financial engineering, industry-wide valuation shifts or operational management. The collection and aggregation of better industry-wide performance data “would make a major contribution to filling the void that currently exists in terms of credibility and authority.” London could become a “center of excellence” for buyout research if this effort was to be properly funded by the big buyout firms.
• Engagement with other industry bodies: The report concluded that, given the cross-border nature of private equity, there is a need for proactive engagement with industry bodies beyond the UK, in particular in Continental Europe and North America, to promote the UK guidelines as a reference benchmark.
In keeping with the nature of the UK private equity’s recent verbal jousts, responses to the report differed greatly. UK GP groups were broadly supportive, with Ian Armitage of Hg Capital saying the report “will help to mobilize all four constituencies of the industry” and Philip Buscombe of Lyceum Capital labeling it “a good start.”
Unsurprisingly, unions were less enamored. Jack Dromey of Unite said the report was “quiet on workers’ rights to the point of Trappism.” Meanwhile, Paul Kenny, general secretary of the GMB, suggested that Walker “thinks it is too much to ask the multi-millionaire elite who run this industry to conform to the ‘burdens’ of complying with the reporting requirements of the Stock Exchange.”
The arguments will rumble on for a while yet. Following its publication, the report commenced a three-month consultation process, with the final findings to be published later this year.