European PE Firms Aim To Appease with Code of Conduct

LONDON (Reuters) – The European private equity industry will propose on Thursday a unified code of conduct to the European Commission, however it will stop short of offering compulsory rules binding the entire industry.

As the economic downturn across Europe pushes companies to the brink of bankruptcy, private equity firms have come under intense scrutiny for their use of leverage. Critics, including the Party of European Socialists, have called for stringent regulation of their activities.

Jonathan Russell, chairman of the European Private Equity and Venture Capital Association (EVCA), as well as head of buyouts at British listed private equity firm 3i Group Plc (III.L), told Reuters the industry recognised the concern expressed and must address it.

“It is not an option just to ignore it,” he said.

In a 300-page submission to the Commission, the industry seeks to distinguish itself from other alternative asset classes, including hedge funds, as well as drawing clear lines between venture/growth capital and buy-outs.

It also states that the private equity business model does not pose a systemic risk to the European economy.

It argues that the industry, which manages some $2.5 trillion of assets globally, is already highly regulated at a national level and that it has a big contribution to make to the economic recovery of the region.


While the industry stopped short of offering a full compulsory code, Russell said non-compliance with an industry framework would be very damaging to a private equity firm’s franchise.

“To be non-compliant would be penal,” he said.

Critics are calling for regulation to include limits on leverage, minimum capital levels for leveraged buyouts (LBOs) and registration and authorisation of management companies and fund managers. And Russell said the industry was ready to sit down with the authorities to work out the best way to implement and enforce any regulation.

In its submission, the private equity industry also offered to introduce a supervisory body to oversee enforcement of the professional standards, which would in turn be accountable at both a national and EU level.

It proposed to complete the unified industry code and the enforcement regime within a year.

“The worst outcome would be some sort of regulation that hasn’t been thought through, that has unintended consequences, that doesn’t deliver what stakeholders and policy-makers want ultimately and hampers an industry that has a lot to add,” said Russell.

By Simon Meads
(Editing by Sharon Lindores)