By James Hamilton, J.D., LL.M.
The UK Private Equity and Venture Capital Association will form a working group to produce a voluntary comply-or-explain disclosure code of conduct for hedge funds. The group, which will issue a report in autumn, intends to examine ways in which levels of disclosure in companies backed by the UK private equity industry could be improved. The working group will be chaired by Sir David Walker, a former Executive Director of the Bank of England. In its work, the group will recognize the very different types of investment and issues relating to different segments of the industry from small start-up financing to large buyouts. It will also take account of the size of the portfolio companies concerned.
More specifically, the working group will address the appropriate levels of narrative and financial reporting, as well as the timing of any increased reporting for private equity-backed companies. Also, the group will examine the clarity and consistency of practice with regard to valuation methodology, its verification and disclosure to investors of returns and fees.
Currently, large private equity-owned companies are not required to provide operating and performance data of the same quality and depth as listed companies. And what they are required to publish can be published much later. While this difference is logically rooted in the distinction between keeping a small group of private shareholders informed and reporting to markets as a whole, UK officials nevertheless believe that large businesses have a wider duty to engage with the community in which they operate and to meet the legitimate interests of stakeholders, both employees and the wider public, in how their operations affect them. As the private equity sector has grown and as some major companies have moved from transparent public to opaque private markets, this need has become more acute, asserted Treasury Economic Secretary Ed Balls MP.
Praising the creation of the working group, the senior official said that additional disclosures would improve understanding of, and confidence in, private equity's stewardship of important UK businesses. It would also assist private equity in addressing fears that there is something inherently short-term or value-destructive about the industry's approach.
In recent remarks at the London Business School, the minister also said that there has been a lack of clear, consistent and complete information on the valuation and performance of private equity investments, and a consequent gap in the ability of institutional investors in handling the governance issues raised by this new investment opportunity. This is not good for either the industry or investors, he asserted.