Walker Group Issues Final Guidance for Private Equity Disclosure

A UK working group headed by Sir David Walker has issued final guidance to enhance disclosure by private equity firms and companies they acquire, called portfolio companies in the report. The guidance is on a comply or explain basis. Any explanation for non-compliance should be posted alongside other related relevant disclosures called for under the guidelines on the website of the private equity firm or portfolio company.

The guidelines call for a portfolio company to disclose in its audited annual report the identify of the private equity fund or funds that own the company and the senior executives or advisers of the private equity firm in the UK who have oversight of the company on behalf of the fund. The report should also detail the composition of the board, identifying separately executives of the company, directors who are executives or representatives of the private equity firm and directors brought in from outside for industry experience.

The financial review should also cover risk management objectives and policies in the light of the principal financial risks and uncertainties facing the company, including those relating to leverage, with links to appropriate detail in the footnotes to the balance sheet and cash flow section of the financial statements.

The guidelines recommend that private equity firms annually or regularly disclose on their website a commitment to conform to the guidelines on a comply or explain basis and to promote conformity on the part of the portfolio companies owned by its fund or funds. The firm should also disclose the most senior members of the management or advisory team and confirm that arrangements are in place to deal with conflicts of interest, in particular where it has a corporate advisory capability alongside its fiduciary responsibility for management of the fund. The Walker group also asks for a description of UK portfolio companies in the private equity firm’s portfolio.

The guidelines also call for private equity firms to act responsibly at a time of significant strategic change. Specifically, a firm should ensure timely and effective communication with employees at the time of a strategic initiative or a transaction involving a portfolio company as soon as confidentiality constraints cease to be applicable. In the event that a portfolio company encounters difficulties that leave the equity with little or no value, the private equity firm should be attentive not only to full discharge of its fiduciary obligation to the limited partners but also to facilitating the process of transition as far as it is practicable to do so.

The Walker report also addressed what it called ``private equity-like’’ investors, principally sovereign wealth funds that use leverage in a similar way to private equity. While there was no mandate to bring sovereign wealth funds within the scope of the guidelines, the report urged investors who operate in a “private equity-like” manner to observe the guidelines as good citizens in their own best interest. The report also cited the general principle that investment activities that are similar in substance should be subject to broadly similar reporting and disclosure provisions.