Encouraging transparency and disclosure by large private equity firms and their portfolio companies, and highlighting examples of good practice reporting
In 2006-7 there was a period of sustained criticism of the lack of information made publicly available by large private equity firms and their portfolio companies. To counter that criticism, Sir David Walker was asked by the British Venture Capital Association (the BVCA) and a group of major private equity firms to review what information firms and their portfolio companies should publish. Sir David produced a set of guidelines in November 2007, called the “Guidelines for Disclosure and Transparency in Private Equity” (the Guidelines). The Guidelines are here.
One of Sir David’s recommendations was that the BVCA should establish an “independent guideline review and monitoring group with a majority of independent members under the leadership of an independent chairman to keep the guidelines under review and to monitor ongoing conformity with them by private equity firms and portfolio companies”. This group is known as the Guidelines Monitoring Group (the GMG) and its website is here.
Which portfolio companies are covered by the Guidelines?
The Guidelines apply to portfolio companies – i.e. companies controlled by one or more private equity firms – which are UK companies:
- Acquired by one or more private equity firms in a public to private transaction where the market capitalisation together with a premium for acquisition of control was in excess of £210million, more than 50% of revenues were generated in the UK or has 1, 000 or more full-time employees.
- Acquired by one or more private equity firms in a secondary or other non-market transaction where enterprise value at the time of the transaction is in excess of £350million, more than 50% of revenues were generated in the UK or has 1, 000 or more full-time employees.
Examples of portfolio companies include Alliance Boots, Merlin Entertainment Group, Findus Group, Travelex, General Healthcare Group, New Look, Odeon & UCI Cinemas and Anglian Water Group.
Which private equity firms are covered by the Guidelines?
The Guidelines apply to private equity firms authorised by the Financial Services Authority that manage or advise funds that either own or control one or more UK companies or have a designated capability to engage in such investment activity in the future, where the company or companies are covered by the Guidelines (i.e. fall within the criteria above).
Content of the Guidelines
The Guidelines set out content requirements for the annual report and accounts of portfolio companies, including identification of the controlling private equity firm or firms and its relevant senior managers, a business review conforming to section 417 of the Companies Act 2006 (including sub-section 5, that otherwise only applies to listed companies, covering main trends and factors likely to affect the business and information about employees, environmental matters, employees and social and community issues) and a financial review to cover risk management objectives and policies.
The Guidelines also require private equity firms to publish a description of their own structure and investment approach and of the UK companies in their portfolio, an indication of the leadership of the firm in the UK, confirmation that arrangements are in place to deal with conflicts of interest, a commitment to conform to the Guidelines on a comply or explain basis and a categorisation of its limited partners by geography and by type.
The Guidelines Monitoring Group and good practice reporting
The GMG produces periodic reports on compliance by portfolio companies and private equity firms with the Guidelines. The most recent report, in December 2010, found that “on balance many of the portfolio companies report to a standard that is generally consistent with reporting by FTSE 350 companies, and in places better”.
In May 2011 the GMG published “Improving transparency and disclosure: Good Practice Reporting by Portfolio Companies”, which aims to assist private equity owned portfolio companies to improve the transparency and disclosure in their reporting by highlighting good practice examples and which can be read here.
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