In February, some of the industry’s biggest players, from American private equity giants Blackstone and KKR to Britain’s and Cinven, asked former Morgan Stanley chairman Sir David Walker to draw up a raft of recommendations to help bring transparency to the industry.
Walker’s blueprint for buyout firms, seen by The Daily Mail and published today, requires those who have signed up to the voluntary code of conduct to publish mid-year and annual accounts, to reveal the names of the senior advisers who manage their funds, and the composition of their boards.
They will also be forced to publish a trading update that includes a risk report and market outlook, as well as providing data to their industry body aimed at giving a clearer picture of market trends.
Also it was announced yesterday that the British Private Equity and Venture Capital Association (BVCA) will create a monitoring and review body to enforce the regulations.
It will consist of five members led by Sir Mike Rake, chairman of .
The recommendations will apply to deals worth more than 300m and to firms that have more than half their turnover in the UK.
But private investors such as Sir Philip Green and Sir Richard Branson will not be included.
The recommendations will not go as far as forcing industry stars like Permira’s Damon Buffini, to reveal how much they take home from carried interest, the amount on top of their annual salary that they can claim from profits once they have paid back their investors.
It also does not require private equity funds to reveal the names of their investors.
‘If that was a requirement all we would get would be a bunch of names,’ says Walker. ‘So instead we have asked for a breakdown of LPs [investors] by geography and function.’
This will do little to pacify those who were expecting more transparency.
Critics are already calling the recommendations a whitewash.
Trade union, Unite, says it is ‘just a way of getting the industry off the hook’, while there are concerns that the new BVCA body has a limited remit that does not cover the entire industry, and has no teeth.
‘I think the risk that they [private equity firms] will not produce annual reports is minimal,’ says Walker, who added that he had not devoted much time to thinking about firms that do not comply with his recommendations. The sanction is disclosure.’
What will cause most anger is firms will be let off the hook if they are able to claim revealing their annual accounts will give competitors an advantage.
Derek Simpson, joint general secretary of Unite, explained: ‘Unless the government enforce some kind of regulation private equity firms will continue to operate shrouded in secrecy.’
Not surprisingly Walker says that, to date, no private equity firms had refused to support his recommendations.
He said: ‘It is in their self interest to adhere to the recommendations as they would not want to stand out.’
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So what’s behind their uneasy path to transparency? It is worth remembering the private equity giants did not implement their industry review for altruistic reasons.
The Treasury Select Committee had launched a separate inquiry so private equity’s DIY job was aimed at spiking their guns. Buffini and Alchemy’s Jon Moulton were called to give evidence.
Private equity, which is behind such household names as New Look, Saga and the AA, has suffered a barrage of criticism in the past year. The public along with politicians were concerned that the industry, which has a reputation for making large profits quickly, was another form of the asset stripping - a hallmark of the 1980s.
There are limited checks and balances and virtually no requirement to reveal facts and figures.
It didn’t help that buy out firms were also taking tax relief on the debt they use to fund takeovers, as well as putting their investments in offshore tax havens, and conducting their business in secrecy.
At a particular industry low point last year they were labelled ‘locusts’ by a German politician who accused them of hollowing out once-productive firms for their own benefit.
The criticism stuck but private equity is not all bad. It is a key powerhouse for jobs, profits and productivity for the British economy.
It raised €75bn in investment last year alone, with much of it channelled back into UK Plc.
But until the ‘masters of the universe’ genuinely embrace change they are in real danger of the politicians bringing them back down to earth with a bump.
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