Disclosure and communication by private equity firms and their portfolio companies
The Guidelines Monitoring Group (the GMG) has produced its fourth report (the Report), summarising the private equity industry’s conformity with the Guidelines for Disclosure and Transparency in Private Equity (the Guidelines). The Guidelines were introduced following Sir David Walker’s review in November 2007 of the adequacy of disclosure and transparency in private equity.
The Report explains that:
“The Guidelines require additional disclosure and communication [than that required by law] by private equity firms and their portfolio companies where the private equity firms and portfolio companies meet the Guidelines criteria.
In addition to the enhanced disclosure requirements, the Guidelines also include requirements on data being provided by private equity firms and portfolio companies to the BVCA, adoption of certain valuation guidelines, reporting to limited partners and the responsibility to ensure timely and effective communication during periods of significant strategic change.”
43 private equity firms and 78 portfolio companies are covered by the Guidelines. A portfolio company is covered if, when acquired, it was a UK company acquired by one or more private equity firms where the enterprise value at acquisition was greater than £350 million (reduced from £500 million) or where the market capitalisation together with the premium for acquisition of control was in excess of £210 million (reduced from £300 million) in a public to private transaction, and more than 50% of revenues were generated in the UK or UK employees totalled more than 1,000 full-time equivalents.
Overview of the findings of the Fourth Report
The Report says:
“The findings of this year’s review identified a higher level of overall compliance with the Guidelines than in previous years. These results are particularly encouraging as the Group has continued to raise the required standard of overall disclosure to achieve compliance with the Guidelines. These improvements also include a significant change in the thresholds and the number of new entrants in both the total population of Walker compliant companies and the composition of the sample selected for testing. This demonstrates the high level of commitment to the Guidelines from the private equity industry. The Group continues to recognise that further improvements are necessary and can be made, in particular in the disclosures of new entrants in to the Walker population.”
The GMG benchmarks the level of reporting by private equity companies against listed companies, in particular FTSE 350 companies. The Report concludes that:
“…private equity owned companies compare well to the FTSE 350, although…this viewpoint differs when comparing previous reporters to new reporters under the Guidelines. In general although portfolio companies are able to reach a similar level of compliance against the requirements, the ability to provide clear linkage of the different areas of the disclosures, particular in relation to strategy, risks and KPIs, falls below the standard seen in FTSE 350 companies. This may reflect a higher desire in FTSE 350 companies to be able to articulate their business to external investors and analysts, whereas private businesses may see less value in this and the information is provided only to comply with the requirements. The key findings include:
- Disclosure of principal risks and uncertainties is an area of strong compliance by both sets of populations, however for private equity portfolio companies these focus largely on the financial risks for the business.
- Strategy is less well explained for Walker companies, including strategic priorities, and this impacts the ability of the disclosures to show a strong linkage between strategy and risk management.
- Although still a relatively weak area, there is better linkage of portfolio company’s corporate, social responsibility (“CSR”) agenda and environmental policy with their overall strategy. Often this is embedded within the same document as opposed to being included in a separate CSR document which may lead to this better linkage.
For more on private equity, see our “Private equity” category.
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