The Walker Guidelines – standards for disclosure and transparency in the private equity sector set by Sir David Walker in 2007 – are now an established part of the UK’s landscape. These guidelines apply to the largest UK portfolio companies and their private equity owners, and, among other things, require affected companies to prepare annual and mid-year reports that broadly meet the same standards as their publicly-listed counterparts.
The guidelines were initially developed in response to concerns expressed by politicians and the media that private equity-backed companies were less transparent than their public equivalents, and that their private equity owners were deliberately secretive. The guidelines have gone a long way towards addressing that concern, especially since compliance is comprehensively reviewed on an annual basis by the Private Equity Reporting Group (PERG) – a body that consists of a majority of independent members and is currently chaired by Nick Land, former chairman of Ernst & Young.
The 11th edition of the annual report was published at the end of last year and makes for interesting reading, especially when read alongside the accompanying Good Practice Guide. The annual report includes a comprehensive analysis of compliance levels by a sample of 15 of the 56 companies that were in scope of this year’s review, and the Good Practice Guide is hugely helpful in explaining how companies can improve next year. As expectations grow, and UK and European regulation demands ever-increasing non-financial disclosures from large companies, compliance is no easy task. It is encouraging that, on the whole, UK private equity-backed companies appear to be keeping pace.
Companies backed by a private equity firm (or an investor that is “private equity-like”) will be within the scope of the guidelines if they were acquired for at least £210 million ($273 million; €240 million) in a take-private deal or had enterprise value of at least £350 million if acquired in a private deal. In either case, they need to generate more than 50 percent of their revenues in the UK or have at least 1,000 UK employees.
Only four companies that were in scope of the guidelines did not make efforts to comply, and none of these were owned by a private equity firm that belongs to the UK industry association, the BVCA. Around three-quarters of the companies reviewed for the report were judged to have achieved a good level of compliance with the disclosure requirements, meaning that they included most of the required disclosures and met standards similar to those achieved by the 350 largest UK-listed companies. No company was judged excellent overall, which would have required it to match the standards of the FTSE 100, although several companies were awarded an “excellent” grade for specific aspects of their annual report.
Despite this generally good report, the industry has more work to do. For example, PERG identifies human rights and gender diversity disclosures as requiring attention, and notes that companies are expected to go beyond their new statutory responsibilities. The Good Practice Guide showcases disclosures from, among others, the RAC and Vue Cinemas to demonstrate how better performers have presented this information.
Because narrative reporting is getting better in the listed sector, firms have to pedal harder just to stand still. Furthermore, the guidelines themselves may well become more demanding next year as PERG assesses the impact of new rules affecting large listed companies, including, for example, the requirement to report on bribery and corruption matters. And, of course, many of the companies covered by the Walker Guidelines will be within the scope of the new stakeholder reporting requirements and the Wates Principles. But not all of them will be, and PERG will have to decide whether to extend those requirements to the full group.
As society and policymakers increasingly expect companies to engage with all of their stakeholders, and annual reports are increasingly used as a policy tool to achieve that, private equity has an opportunity to confound its critics and lead the way. Good governance is regarded by many as a critical success factor for the sector. Clear and transparent disclosures will go hand-in-hand with that and help to ensure that private equity is seen by governments as part of the solution, rather than as part of the problem. The work that PERG and the BVCA are doing helps greatly with that effort.
Simon Witney is a special counsel and Katherine Ashton is a partner at Debevoise & Plimpton.