Comply or explain, says Walker

The onset of the current “credit crunch” does not mean private equity is off the hook when it comes to issues of transparency and disclosure, Sir David Walker warned last week.

Speaking at a debate arranged by law firm SJ Berwin and attended by a number of big industry names including Philip Yea, CEO of 3i; Wol Kolade, chairman of the BVCA; and Michael Fallon MP, Walker said: “I have been struck by the fact that one or two of the larger firms have said to me over the last couple of weeks that disclosure is not the topic; that there is now another topic on the agenda and that we can move on and forget all this stuff.

“I said in July that private equity has been driven here by two forces – one is the credit cycle, which lets say has now come to an end, the abundant availability of debt, cheap rates and zero conditionality; but it is also driven by powerful secular forces. There may be a slowdown and refinancings will become harder to do etc, but these secular forces will continue to be in place and will remain, I hope, as strong as ever over the next five to 10 years.”

In July, Walker published preliminary proposals regarding his independent review of reporting and transparency in the private equity industry. At this debate, Walker and the panel discussed some of initial reactions to these proposals.

One of the main topics discussed was the issue of compliance.

“Guidelines should be flexible and evolve with circumstance and time,” he said. “We don’t want to hit Europe with a set of guidelines exported from the UK as the US are apt to do. But something that is sensible, flexible and pragmatic, the London way of dealing with issues, which other jurisdictions might be interested in implementing.”

He also warned against calls for a “level playing field”, whereby figures such as the Barclays brothers, Philip Green, Richard Branson and the increasingly prominent sovereign funds should also be subject to these new guidelines.

“Be careful what you wish for; the only way to do this is through primary legislation and is this really the road the private equity industry wants to go down?” said Walker. However, he must be somewhat gratified that sovereign fund Delta Two has subsequently pledged to follow the new guidelines in its dealings with Sainsbury.

Nevertheless, Walker said that in situations where disclosure would put a private equity firm at a competitive disadvantage in relation to its private or listed counterparts, then the private equity firm could “exercise judgement and explain why the situation justifies non-compliance”.

Some on the panel had reservations regarding this “comply or explain” strategy. Wol Kolade, chairman of the BVCA said: “Comply or explain is very important, but it has to be made clear that explaining does not cast aspersions on the actual individuals involved, and we need a body that will explain this.”

John Cridland, deputy director general of the CBI, added: “The problems with a ‘comply or explain’ philosophy are the big risks when it moves from something the industry wants to do voluntarily, and with passion, to loss of ownership.

“There is a lot of stake here – what has happened in the listed market is very relevant,” he said. “Self-regulation in the listed market has meant they have lost some of the ownership of their companies; it has become something that is done to them rather than done by them. We are still fighting the battle in the listed market that ‘comply or explain’ is not about ticking boxes – and we don’t want to go down this road in the private equity industry.”