The UK’s Association of Investment Companies has welcomed the review of disclosure and transparency for the private equity commissioned by the British Private Equity and Venture Capital As
The UK’s Association of Investment Companies has welcomed the review of disclosure and transparency for the private equity commissioned by the British Private Equity and Venture Capital Association (BVCA) from former banker and regulator Sir David Walker, which sets out a voluntary code of conduct for the industry.
The AIC has expressed particular satisfaction that the report, entitled Guidelines for Disclosure and Transparency in Private Equity, has endorsed its stance that other businesses owning large private companies, including sovereign wealth funds, should be encouraged to follow the new guidelines, and says every effort should be made to ensure this is achieved.
The guidelines are aimed at private equity firms managing or advising funds that own or control large UK companies, or that have the ability to invest in such companies. Companies in question are those that generate more than 50 per cent of their revenues in the UK, have more than 1,000 full-time equivalent UK employees, and have at time of acquisition an enterprise value of GBP500m in the case of a secondary or non-market transaction, or a market capitalisation including control premium exceeding GBP300m where a company is taken private.
The Walker review says portfolio companies should publish an annual report and accounts to include enhanced disclosure on their website within six months of the year-end, publish a mid-year update within three months of mid-year, and provide data to the BVCA, notably for an enlarged economic impact study.
Private equity firms are called on to publish an annual review to include enhanced disclosures or regularly update their websites to show this information, to use established guidelines for reporting to limited partners and in valuing investments, and to provide data to the BVCA for the economic impact study and to allow industry-wide attribution analysis on private equity returns. The analysis will seek to allocate increases in company value between financial structuring, market movements and operational improvement. The code also requires private equity firms to communicate ‘promptly and effectively’ with employees, particularly in times of strategic change.
‘This report is a sensible model for the responsible ownership of private companies,’ says AIC director-general Daniel Godfrey. ‘It is right that owners and managers of large private companies should recognise the legitimate interests of a broader range of stakeholders, from employees and unions to customers, suppliers and communities.
‘Owners and managers should be willing to engage openly with such stakeholders, but the limits of engagement must be set in such a way that it does not compromise the private company’s commercial objectives or prospects.
‘During the consultation, the AIC called for increased disclosure, on a ‘comply or explain’ basis, for all large private companies regardless of their ownership structure. We see no reason why companies owned by private equity should be singled out for special attention.’
The AIC argues that there is no obstacle to high levels of disclosure and transparency, pointing to the listed private equity investment company sector. ‘The listed private equity sector already meets the highest standards of transparency through regular public reporting, which is a benefit to shareholders and other stakeholders,’ Godfrey says. ‘This transparency has had no adverse impact on their investment process and a number of new companies have been launched this year.’
Richard Moulton, a corporate partner at law firm Eversheds, which specialises in advising mid-market private equity firms, notes that pressure to establish a voluntary code of conduct has come from criticism directed at the industry in the media and by trade unions.
‘Sir David’s guidance highlights the significance and importance of private equity and calls for more transparency in order to dispel the myths surrounding the industry,’ he says. ‘Private equity, particularly for medium-sized growth businesses, is a vital business enabler, and it is therefore important that there is a good understanding of and clarity about the industry.’
But Moulton cautions: ‘Our only concern is that guidance primarily designed to manage and create openness around larger high profile private equity deals does not add an unnecessary administrative burden or cut off mid-market investment, which provides vital support and funding for British business.
‘Our recent survey of deals in the mid-market sector found that that 64 per cent of companies involved in private equity buyouts achieved their business plan objectives with one third actually out-performing the plan, and that for 75 per cent of firms a private equity-backed primary or secondary buyout appeared to be the only option. The guidance must support the mid-market as well as creating transparency across the whole industry.’
