Private equity ‘code’ requires more info
UK - Private equity firms in the UK and the companies they own will have to publish more information on the way they do business and the risks they face, according to a new code of conduct unveiled today.
A set of guidelines and recommendations for disclosure in the sector were drawn up in a report by City banker and former regulator (Sir) David Walker. His report was commissioned by private equity body the British Private Equity and Venture Capital Association (BVCA) in March.
As the role of private equity has expanded in the UK economy, public pressure for transparency has grown and trade unions in particular have called for more accountability.
In a news conference, Walker defended the idea of a voluntary code of conduct rather than tighter legislation for the sector, stressing because private equity was a cross-border business, firms could simply locate themselves abroad if UK law was unfavourable.
"The trick to be turned is to put in place a regulatory structure - call it ‘enlightened self-interest' - so it makes sense [for the firms] to remain here and ply their trade," he said.
Companies owned by private equity groups - or "portfolio companies" - should publish an annual report and accounts on their website within six months of the year end, the new guidelines state. This report should also identify the private equity fund or funds which own the company, as well as the senior managers overseeing the funds and the people on its board.
There should also be a business review conforming to section 417 of the Companies Act 2006, including sub-section 5 that otherwise only applies to quoted companies, the code states.
This section calls for an indication of the main trends and factors affecting the company's future, business performance, information on employees, environmental and social issues. The code also requires these reports contain a financial review to cover risk management aims, in the light of the main financial risks, including those relating to leverage.
As far as the private equity firms themselves are concerned, they will now be required to publish a description of their own structure and investment approach and of the UK companies they own, an indication of the leadership of the firm in the UK and confirmation of arrangements to deal with conflicts of interest.
This disclosure could be made as part of an annual review or through regular updates on its website, the report suggests.
However, as well as outlining the new disclosure rules, Walker's report was also critical of the BVCA's profile as an industry body.
"It's very important that the BVCA up its game," Walker said, arguing it should become the authority on the impact of private equity, where there was currently a "gaping hole.
Pension funds have increasingly been investing in private equity as a diversification route to their asset allocation, however, private equity and its role within the economy has seen increasing pressure from European governments to improve transparency to the public and investors.
Moreover, pension funds have in recent months been in confrontation with such firms where the sponsoring employer has been subject to a takeover bid.
Local authority pension funds in the UK have also found it difficult to consider investing in private equity because they, as a government body, are required by law to publish all of its investment information, but has so far found it difficult to do so because of confidentiality restrictions on the part of the firm.
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