Large buyout firms are set to bear the brunt of Sir David Walker’s proposed voluntary disclosure code, after the man charged with improving transparency in UK private equity published his initial findings today. He said there was “no silver bullet”, but offered a suite of guidelines for consultation.
Responding to claims his guidelines were toothless, he said an enforcement mechanism could be introduced at a later date, if his expectation that a majority of firms would conform was disappointed. “I can’t be certain the guidelines will be observed, but they are a place to start.” He said the code would rely on the media and other interested parties, such as the unions to ensure the firms that ignored the guidelines were named.
He also said he expected international firms to comply, even if they were not based in the UK and made investment decisions from abroad. He said: “KKR and Blackstone both have significant mind in London, charged with responsibility for businesses in Europe.”
He said the additional cost of compliance would be small relative to the amount of money the industry was generating. However, he suggested the BVCA would have to draw significantly larger contributions from the big buyout houses to fund an increase in the amount and quality of data collected on the industry in the UK.
Walker’s long-awaited report suggested new disclosure requirements for large portfolio companies – defined as companies formerly in the FTSE 250, an index of the UK’s biggest listed companies; companies with more than 1000 employees and a value of more than £500 million (€742 million; $1.02 billion); or companies where the deal price involves an equity consideration of more than £300 million.
Walker wants these large companies to publish an annual report within four months of their financial year-end, rather than the nine months required by Companies House, which outlines the composition of their entire board, details the level and structure of their debt, and talks about the company’s values and “role in the wider community”. He said the cost of publishing would be marginal. In the case of a delisting of a public company, such as Boots much of the information would be already available and the disclosure less onerous than that for a public company.
In time, these requirements could be extended to other large private companies, he believes.
However, he argued strongly against moves towards public company-style reporting, which he described as “an incubus that need not and should not be imposed on private equity”.
Walker also 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 – although he did concede that firms may look to appoint outside directors, albeit dependent, for the sake of “constructive tension” on the board, particularly when it came to the company’s audit committee.
He said the idea of non-executive directors in the sense of the combined code for listed companies would be a “dotty idea” in a private equity context.
The requirements will be welcomed by small and mid-market buyout firms, who had been concerned about the possible imposition of overly-onerous reporting obligations. The industry as a whole will also be relieved that Walker ruled out any increased reporting requirements for GPs to LPs, suggesting the current arrangements were “generally satisfactory”.
However, he is proposing changes – across the industry – to the way that private equity firms interact with their broader stakeholder base. He wants all GPs to publish an annual report on their website that include details of senior management, an explicit commitment to transparency principles, and a description of their philosophy regarding employee relations and CSR (corporate and social responsibility).
He also wants 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. Firms must also be “more accessible to specific enquiries from the media and more widely”, he believes.
But to widespread relief, he explicitly argued against any greater disclosure of buyout professionals’ remuneration.
Walker’s other focus was the collection and aggregation of better industry-wide performance data. This, he said, “would make a major contribution to filling the void that currently exists in terms of credibility and authority”. He said London could become a “centre of excellence” for buyout research if properly funded by the big buyout firms.
Walker accepted that private equity had done a bad job of explaining itself. This was partly a result of its rapid recent growth, but also the result of “the understandable tendency of many in the industry, who chose not to be in the public eye of the listed sector, to say that “private means private” and to be attentive to confidentiality to the point of secretiveness,” he said.
The report will now undergo a three-month consultation process, with the final findings to be published later this year.