Walker Review Calls For More Private Equity Transparency

by Robin Pilgrim, LawAndTax-News.com, London

19 July 2007

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

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

In his 45-page report, Sir David wrote that private equity firms had been "needlessly secretive, feeding suspicion and, in some cases, hostility," towards the industry. "There is thus a major transparency and accountability gap to be filled," he argued.

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.

These principles are to be enshrined in a voluntary "comply or explain" doctrine to be drawn up by Sir David later in the year, after a three month consultation with the industry on the report's conclusions. This will be monitored by a group of trustees. The review however, rejects the need for new legislation or government regulation, pointing to the experience of the United States, where companies are struggling to cope with the burdens placed on them by the Sarbanes-Oxley legislation.

“The line between openness and secretiveness should be drawn with much greater flexibility than hitherto,” Sir David said.

The report also stopped short of calling on the wealthy bosses of private equity firms to disclose their personal earnings or provide details of their tax arrangements.

Sir David said that his intention and expectation is that the enhanced disclosure and transparency which these guidelines will generate should do much to mitigate the concerns about the opacity of private equity that are being addressed by lawmakers in the Treasury Select Committee.

The four-month review was commissioned by the industry as it attempts to head off growing calls for legislation to force funds to open their books as they begin to target some of the UK's largest companies - buyout firms have announced $58 billion of takeovers of UK companies this year alone. However, critics of the review have questioned its balance and the independence of its author; Sir David is a former Bank of England director and former chairman of investment bank Morgan Stanley, but he still works for the latter in an advisory capacity, and is said to have advised several private equity companies.

Sir David and the private equity industry have rejected allegations of bias in the report, but the document was nonetheless welcomed by the industry lobby group, the British Private Equity and Venture Capital Association.

"Sir David has produced a clear and powerful document, which poses some real challenges for the larger buyout houses in particular. Our members will need to study this carefully and we urge them to make their views known. We agree that there needs to be more transparency, but there must also be a level playing field between private equity and other private companies. We will also want to make sure that the overall competitive position of the UK as a place to do business is not undermined," commented Wol Kolade, Chairman of the BVCA.

He continued: "The document makes recommendations about the need for more data and research on the private equity industry. Thanks to the work of the BVCA, there is more industry-wide information available in the UK than in any other country, but we accept that there needs to be more. The BVCA will take the lead in considering how best to respond to that recommendation."

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