Openness and transparency have not always been the strongest points of the private equity sector. Today GPs in many markets are working to improve on that, and Sweden is no exception.
Some of the country’s firms including Nordic Capital, EQT Partners, Altor, Segulah, IK Investment Partners and Litorina have teamed up with the Swedish Private Equity & Venture Capital Association (SVCA) to establish a code of conduct for the industry.
The code, which will be drawn up this autumn, will lay out how GPs should behave as company owners. The rules will relate to employees of portfolio companies, labor unions and transparency, as well as environmental, social and governance issues (ESG).
The self-regulatory code, which will be administered by a board that will handle complaints, is expected to be in place by the end of the year, according to Gabriel Urwitz, chair of the SVCA and managing partner of Stockhold-based private equity firm Segulah.
The combined turnover of private equity-owned businesses accounts for more than 8 percent of GDP, and this comes with a more societal responsibility
“The initiative has been discussed for quite some time in our organization,” Urwitz said, describing the code’s creation as a reaction to the increased interest of Swedish society in private equity as the sector has grown significantly in recent years. “More than 200,000 Swedes are employed by companies employed by private equity, which is more than 5 percent of all employees. The combined turnover of private equity-owned businesses accounts for more than 8 percent of GDP, and this comes with a more societal responsibility,” he added.
As the industry has grown, firms have expanded their investment activity into the public sector, for instance in healthcare and education. This has meant the industry has become more visible to the public, and not always in a positive way. “There have been some bad incidents in Sweden, whereby business owners – which weren’t Swedish private equity firms – all of a sudden closed a school down in the middle of the semester,” Urwitz said.
IN A BAD LIGHT
The industry’s image in Sweden has suffered in part because of an investment by KKR and Triton in elderly care home group Carema. In February 2010, Triton bought the company from 3i Group, and two months later invited KKR into the deal. In November 2011, the firms came under fire as Carema was accused of neglecting patients and criticized for its tax and remuneration practices. As a result of the public pressure, the private equity owners converted loans to share capital, which under Swedish law is taxable. In addition, bonuses were also axed, “given the public criticism”, according to a board statement.
“There was certainly finger pointing towards the private equity ownership model. However, since we have invested in Carema, we have never taken one cent out of the company; there have never been any dividends, all the revenues have been reinvested,” said Henrik Kraft, who leads KKR’s operations in the Nordics.
“When you invest in a sector that is providing a public service – even though the tax structure that was set up was perfectly legal – you have to consider how it will be perceived and whether it’s appropriate for that sector. That’s why we changed it immediately in 2011,” he said, adding that KKR was very much in favor of the code.
A Triton spokesperson said: “There were a few instances where Carema didn't live up to quality standards, something for which both owners and company publicly have apologized for.”
“At the same time it has been thoroughly proved afterwards, by other journalists, that a lot of the reporting in media was actually false and based on misunderstanding and factual mistakes,” the spokesperson said, adding that the main reasons for a new code “is probably as much linked to the debate about tax structures and private equity in general having been rather secretive before, and indeed the need to better explain how private equity creates value for all stakeholders.”
There was certainly finger pointing towards the private equity ownership model. However, since we have invested in Carema, we have never taken one cent out of the company; there have never been any dividends, all the revenues have been reinvested
any event, the Carema case caused “a tremendous uproar”, Urwitz said. “No doubt the Carema incident – even though what actually happened in that case can be debated – had a negative effect on the image of private equity, with bad press reports day in day out,” Urwitz said. “We felt that we needed to develop a stricter code of conduct for our members. We want to be perceived as good citizens. Unless we are perceived as being good owners, we won’t be able to do business here.”
While the SVCA had “some statues and some principals in the past”, drawing up a code has never been done in “an organized manner across the industry,” Urwitz said. “It is important to have this codified and have a common code of ownership behavior for private equity firms.”
As the code is self-regulatory, real sanctions for non-abiding members will be absent. “We can’t fine people of course,” Urwitz admits, although if GPs break the rules they run the risk of losing their membership with SVCA. However, bad practices will attract negative media reports “and we think that will be enough [to enforce good behavior],” Urwitz said.
He denied the move was motivated to appease Swedish policymakers, who have threatened to increase taxes related to private equity in recent years. “This has nothing to do with tax issues. That is a separate issue,” Urwitz said.
As well as teaming up with the SVCA, firms have also taken steps individually to become more open. In June, EQT Partners said it would increase transparency by changing its corporate structure. EQT has brought all its various funds onshore under a new holding company called EQT Holdings, following its decision last year to manage all funds established in 2012 and onwards onshore in Europe.
While EQT insisted it would be more practical to move the administration onshore, it also admitted reputational issues played a part as well. “It’s a reality that being based in tax havens doesn’t [go] down well with all of our investors, such as pension funds and sovereign wealth funds,” said in a recent interview Johan Bygge, chief operating officer at EQT Holdings.
“EQT in particular are well known and really need to please the media,” one legal source in the Nordics said. “[Plus it] still has significant interests in healthcare and other publically funded businesses [which increases the level of scrutiny].”