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Sir David Walker publishes guidelines for UK private equity industry20/11/2007. Source: AltAssets. 
 Sir David Walker has published his Guidelines for Disclosure and Transparency in Private Equity, recommending that both private equity firms and their portfolio companies disclose more information. However, the private equity business will remain a private business and Sir David does not see the need to make it wholly transparent. The guidelines are a measure of self-regulation of the industry and apply to those buy-out firms that own or look to invest in larger UK companies.
Private equity firms are now required to publish an annual review or regularly update their websites to show information on their portfolios and investor base. They should use established guidelines for reporting to LPs and for the valuation of investments, and communicate promptly with their portfolio companies' employees, particularly in times of strategic change.
Portfolio companies will need to publish an annual report and accounts to include enhanced disclosure on their website within six months of year-end. They should also publish a mid-year update no later than three months after mid-year. Sir David wants to apply section 417 of the UK Companies Act 2006, including sub-section 5 that otherwise applies only to quoted companies, to the private equity industry's portfolio companies as well, calling for an indication of trends and factors likely to affect a company and to include information on the company's employees, environmental matters, and social and community issues.
The British Private Equity and Venture Capital Association is to play a significant role in the self-regulation process. GPs will need to provide data to the BVCA for both the enlarged economic impact study and to allow industry-wide attribution analysis on private equity returns. That analysis will aim to attribute increases in company value to financial structuring, market movements and operational improvement respectively. Portfolio companies will need to provide data to the BVCA, particularly for the enlarged economic impact study.
Sir Walker argues that there is no need for GPs to disclose their compensations structures. From his discussions with LPs he has come to the conclusion that LPs are happy with the information they receive from GPs. In his opinion compensation is always a matter of the company owners and as long as they are happy there is no need for further transparency.
The guidelines were produced as the UK private equity industry's answer to increasing criticism by the media, trade unions and politicians. With growing deal sizes and deals that have a potential impact on a large workforce, the buy-out firms had to accept that they could no longer continue doing deals quietly. Misconceptions about the industry threatened deal successes and the business as a whole. That was why the BVCA asked Sir David at the end of February to undertake and independent review of the private equity industry and to produce a set of guidelines that all UK buy-out players would be asked to adhere to on a voluntary basis.
The BVCA admitted in their statement that it will take time to put the appropriate processes in place. However, it is putting in place a group that will monitor and review the guidelines. This group will be led by Sir Mike Rake. Data collection is already underway and firms have been asked to give data on deals done over the past year.
There will not be a requirement for private equity firms to produce an attribution analysis, as Sir David believes this is better done for the industry as a whole. When challenged, he argued that if private equity firms produced their own attribution analysis it would probably be published with a marketing spin on it and used to create a competitive advantage.
Sir David has said that his recommendations have already attracted interest from abroad, namely Scandinavia, Germany, Canada and the US.
Sir David was assisted by an advisory group comprising Adrian Beecroft (Apax Partners), David Blitzer (The Blackstone Group), Robert Easton (The Carlyle Group), Anne Glover (Amadeus Capital Partners), Robin Hall (Cinven), Baroness Hogg (3i), Lord Hollick (Kohlberg Kravis Roberts & Co.), William Jackson (Bridgepoint), Dwight Poler (Bain Capital), Sir Mike Rake (British Telecom) and Rod Selkirk (Hermes). Further input came from Charterhouse, CVC, Permira and TPG.
Sir David stressed at a press conference that the guidelines are his work and not the result of a negotiation process with private equity firms. They contain all the points he believes are necessary to meet all self-regulation needs.
His recommendation is that sovereign wealth funds, such as the Qatar Investment Authority, should be asked to adhere to the new set of rules.
The key to enforcing the new guidelines will be peer group pressure and pressure from the media, politicians and the unions. Sir David is very confident that it is possible to enforce his rules on a voluntary basis and that his 'comply or explain' principle will not be abused in a way that private equity firms 'explain' more than they 'comply'.
If the industry manages to improve its image and communicate the benefits it brings to the wider economy, it is likely that it can avoid tougher regulation by the UK government. There will, of course, be costs involved with increasing transparency and reporting requirements. However, Sir David argues that this is unavoidable as it is a side-effect of being a major force in the UK economy.
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