The highly-anticipated Walker Report was finally released today, with its “comply or explain” recommendation in tact. The report is the result of inquiry launched by Sir David Walker at the behest of the BVCA, and lays out a series of disclosure guidelines for larger private equity firms and their portfolio companies.
Download the report here: WalkerReport.pdf
The main difference between today’s report and July’s consultation document is the omission of public disclosure of fund performance, which had received widespread industry disapproval. Another noteworthy alteration was the formalization of the scrutiny to which private equity firms are held. Walker recommended that the BVCA establish an independent guideline review and monitoring group, which it has done with a five-member panel that will include two PE pros, two outsiders and BT chairman Mike Rake at the helm.
John McFall, the outspoken chairman of this summer’s Treasury Select Committee hearings, immediately bemoaned the lack of information private equity firms will be obliged to disclose compared to PLCs. He also criticised the guidelines for being voluntary, arguing that they should be compulsory for all BVCA members.
Buchan Scott of Duke Street Capital, on the other hand, believes that the voluntary process will work because they will become a de facto best practice for the industry. “A number of the better firms have already accepted the Walker Report and are already cranking up their communications output. It will become a best practice and the firms adhering to it will drag the others along and the industry as a whole will change through a kind of osmosis.”
Why? “If it doesn’t work there is the threat of legislation and no-one wants that. It’s a harsh way of dealing with the situation and one which can give rise to all sorts of unexpected consequences. Just look at the effect Sarbanes-Oxley has had on the US public markets,” he continues.
The industry does not really have too much to complain about from this code. For one thing, it only applies to large PE-backed companies: (a) Those that have been taken private with a market capitalisation in excess of £300m, or (b) a company not acquired from the public markets with an enterprise value at the time of transaction of more than £500m, and which generate more than half of their revenue in the UK and has more than 1,000 UK employees on its books. Businesses which fall under the Walker Code – around 65 in total – are going to be required to include details of its private equity owners – including who is running the fund(s) and the composition of the company’s board – in its annual report, and publish a mid-year update giving a brief account of major development in the organisation, as well as providing the BVCA with data to support the body in its collection of information about the industry and its impact on the economy.
This last issue is particularly important to Sir David and is repeated throughout the report. He wants the BVCA to “come to be respected as a centre of excellence in data dissemination, analysis and appraisal of private equity in a way that will be positive for the United Kingdom as a key ‘home base’ for private equity activity.”
“The private equity industry has been horribly anecdotal,” says Scott. “In the past it hasn’t worked very hard at collecting data that shows the benefit of private equity, and then when the criticism of the industry started to mount up and statistics were produced, everyone just turned around and said they didn’t believe them. The whole thing about the new monitoring body is it has to be seen to be independent. It’s not just a question of being right, it’s a question of persuading other people you are.”
One possibility is that firms will increase headcount to meet the new reporting requirements, although Scott isn’t so sure: “Most firms have got the staff for this already, the bigger issue will be persuading the management of the portfolio companies that this is the best thing to do, but once you get over the initial resistance, they will be wondering why they didn’t use them all along. The one area where I think firms will be hiring more is communications staff as they look to paint themselves and the industry in a better light.”
Indeed, the BVCA has got a headstart on everyone here with their new CEO. Simon Walker (no relation to David) has a strong PR background, having previously been communications secretary to The Queen and a director of corporate affairs at British Airways. It’s not been a good year for the BVCA to say the least, and the recruitment of someone with such a background is a sign of how the organization wants to play the media game going forward. The Walker Code is an opportunity for the industry to answer its critics, although judging by some of the reaction, it’s still not going to be good enough.
In fact, it’s unlikely anything is going to be for people who are fundamentally opposed to the idea of private equity. Witness this choice quote from Paul Kenny, general secretary of the GMB trade union, who welcomed thus: “These are the people who brought us the Northern Rock fiasco and their reckless and heedless pursuit of multi- million bonuses could spill over into a recession.”