In the last year, as scrutiny on the buyout business intensified, Europe has set the worldwide tone for regulation and compliance.
While the U.S. Congress hemmed and hawed this year about modifying the tax treatment of carried interest before finally passing nothing, the U.K. government is lining up the machinery to pump out a new tax treatment law.
More evidence of the European regulatory vanguard came last month, when Sir David Walker, a former Morgan Stanley banker and government official, issued his report outlining ways U.K. private equity firms could make themselves more hospitable to their legions of detractors. It’s hard to describe just how loud the criticism has been and what kind of environment greeted Sir David’s report. Consider that the ranks of those vehemently opposing private equity were joined, a few weeks ago, by the rock band Radiohead, whose bassist said that record label EMI’s new private equity owner knew nothing about the music industry, thus explaining why Radiohead went solo for its latest album. It’s hard to imagine Jennifer Lopez taking the same stand here in the United States.
The Walker Report’s ultimate goal is transparency. Under Sir David’s recommendations, firms wouldn’t have to disclose the performance of their funds—a concession to general partners who considered the measure unsupportable, according to the European Venture Capital Journal, a sister publication. But firms will have to make disclosures about their biggest portfolio companies, disgorging information about the composition of the board and certain pieces of financial data. For the British Venture Capital Association, the data collection should prove useful as it tries to make its case that private equity improves the economy and creates jobs.
Compliance with the recommendations spelled out by the Walker Report is voluntary, and its guidelines are modest. As one source told EVCJ, “It’s the sort of information we already give.” If it seems too easy, it’s worth noting the widespread belief that Sir David’s work won’t permanently stave off official government regulation, especially since the guidelines only apply to the biggest private equity firms. Moreover, the industry’s chief antagonist, John McFall, a member of Parliament, already dismissed the report as a preliminary gesture proposed by an insider. McFall said the report doesn’t go far enough.
Whatever the ultimate outcome, it’s no stretch to assume that lawmakers on this side of the pond have taken notice. In 2007 alone, the U.S. buyout business went from being a barely noticed corner of high finance into a much-discussed facet of the American economy. Increased regulation almost always follows increased scrutiny, which means U.S. LBO firms should anticipate seeing the kinds of proposals now gaining traction in Europe. Indeed, a handful of U.S.-based firms that operate in the United Kingdom have endorsed the report, including The Blackstone Group and Kohlberg Kravis Roberts & Co.