Wednesday, July 18, 2007

Walker Report Suggest Enhanced Disclosure by Private Equity Firms

By James Hamilton, J.D., LL.M.

A blue ribbon report indicates that private equity firms needs to become more open and transparent without eroding their capacity to act as positive market forces. The report by the working group chaired by Sir David Walker recommended that managing partners of private equity firms publish a website-accessible annual review on the values that inform their business approach and the governance of their portfolio companies. Given the cross-border nature of private equity, said the report, there is a need for pro-active engagement with industry bodies in the UK, Continental Europe and North America, to promote the guidelines put in place in the UK as at least a reference benchmark.

The broad approach envisaged us for the adoption of voluntary guidelines after a consultation process that will be completed by October 9, 2007. The guidelines will be on a comply or explain basis.

The annual review to be published by the private equity firm’s general partners should include an indication of the leadership team of the management company, identifying the most senior members of the general partner team or general partner advisory group. It should also contain a commitment to conform to the proposed guidelines on a comply or explain basis.

Further, under the rubric of the values of the private equity firm and the general partners,
The annual review should contain the philosophy of their approach to employees and the working environment in their portfolio companies, to the handling of conflicts of interest that may arise, and to corporate social responsibility.

The review should also give a broad indication of the performance record of their funds, with an attribution analysis to indicate how much of the value enhancement achieved on realization and in the unrealized portfolio flows from financial structuring, from growth in the earnings multiple in the market in the industry sector, and from their strategic and operational management of the business.

Investors in the funds should be characterized, including pension funds, insurance companies, corporate investors, funds of funds, banks, government agencies, endowments of academic and other institutions, private individuals and others.

Alongside the annual reviews, the working group expects private equity firms to be more accessible to specific enquiries from the media. While confidentiality concerns will constrain responses, the Walker group draws the between openness and secretiveness with much greater flexibility, especially in respect of large transactions which would attract very full public presentation.