BVCA Publishes Annual Report On Private Equity-Owned Firms

by Robin Pilgrim, LawAndTax-News.com, London

15 January 2009

The British Venture Capital Association (BVCA), in association with Ernst & Young, on Wednesday published its first annual report on the performance of the largest UK companies owned by private equity firms, as recommended by the Walker Guidelines for Disclosure and Transparency in Private Equity.

The Walker review into the conduct of private equity firms in the UK, concluded in mid-2007, recommended that they adhere to a new code that would promote greater openness and transparency, but unsurprisingly stopped short of recommending new legislation to enforce this.

In his eagerly anticipated report, Sir David Walker concluded that there was a need for the private equity industry to "become more open" and put forward arguments for buyout firms to report to "an enhanced standard" going beyond requirements laid down in the 2006 companies legislation.

The report recommended that private equity companies should: publish annual accounts within four months of the company's year-end; state the level, structure and conditionality of debts; disclose who manages the funds; detail the company's values and its approach to employees, customers and suppliers; and publish an annual online review giving details of their funds' performance and the types of institutional investors that are backing the fund.

The four-month review was commissioned by the industry as it attempted to head off growing calls for legislation to force funds to open their books.

The report analysed 28 portfolio companies that met all of the Walker Guidelines criteria at December 31, 2007 and a further 14 companies which exited over the period 2005-2007 and met the criteria.

Harry Nicholson, partner at Ernst & Young, observed that:

“ While the data set is small in terms of the number of businesses, it is complete and it will grow with time. The results to date, aggregated across all of the portfolio companies, show that under private equity ownership there has been organic growth in revenue and profits, i.e. excluding the effect of subsequent acquisitions and disposals. Behind this, there has been organic employment growth of around 1% per annum, faster growth in productivity (7.5 % per annum) and investment in new fixed assets ahead of depreciation.”

Simon Walker, Chief Executive of the British Private Equity and Venture Capital Association, responded to the report's findings, stating that:

“This independently-produced report was commissioned as part of the Walker guidelines process and has been vetted by the Guidelines Monitoring Group. It concentrates on a small (although still significant) number of companies, and covers the time from initial acquisition up to the latest annual accounts or exit, mostly over the period 2003-07 and reflects the market conditions of that time. It is valuable, because it demonstrates that many of the accusations made against private equity at that time were not – and are not now – remotely accurate."

He continued:

"Its findings are, furthermore, consistent with a number of other studies. Money was not made during these years through “asset stripping.” Indeed, “asset strapping” – acquisitions rather than disposals – were often a central feature of private equity activity. Debt did play a role in the value creation process but not at the cost of either investments or employment."

In conclusion, the BVCA chief suggested that:

"Strategic and operational improvements were pivotal to success. This last fact is especially relevant as the 2009-2011 period is likely to see private equity companies focus even more forcefully in precisely these fields.”

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