Legal Briefs: How Much Disclosure Is Enough?

Private equity in the United Kingdom has gotten a lot more transparent in the last month.

A small number of privately held U.K. buyout firms have begun publishing annual reports for public consumption—a response to a set of voluntary guidelines championed by Sir David Walker, the former head of Morgan Stanley’s international business who was tapped by the British Venture Capital Association to help heal the industry’s battered image.

Taking the mission to heart, Terra Firma Capital Partners, one of the biggest shops, unleashed a 120-page report on the public that is the most exhaustive and colorful of them all. Its chief, Guy Hands, has notably said that “the simple truth is that we have nothing to hide,” and he was willing to spend €325,000 ($517,000) and 2,000 hours of the firm’s resources to prove it.

The Terra Firma report suggests why the reports are likely to both be commended and rebuked. On the transparency-positive side, for example, Terra Firma lays bare basic but previously off-limits financial information about its portfolio companies, including revenue and EBITDA numbers. On the transparency-negative side, however, the report tells the reader the average salary and bonus compensation in 2007 for each of the firm’s 15 senior executives (£665,053, or $1,317,312), but omits income earned from carried interest. That’s of course where their big bucks come from. Put it this way: Hands didn’t become the 281st richest person in the U.K. by earning $1.3 million a year.

Other firms chose to disclose altogether less. Bridgepoint, a mid-market shop specializing in retail companies, assembled a paltry 18 pages that shed light on very little. Also, none of the firms supplied the names of any of their limited partners, which many critics would like to see.

Walker was acting on behalf of a brow-beaten industry, one whose chieftains were marched before Parliament a year ago to answer for their supposed misdeeds, including being indifferent to the plight of employees at portfolio companies, taking home outsized paychecks, and claiming a comparatively lower tax rate on the profits they took home.

The volume and tenor of the sniping far surpassed the criticism heaped on buyout firms in the United States. But there was a sense that it was only a matter of time before U.S.-based firms would have to acquiesce to similar requirements for transparency and disclosure—or at least a higher tax rate. It’s unclear whether distribution of the annual reports is going to assuage the U.K. public’s concern about private equity’s iniquities. What is clear is that the firms felt different degrees of responsibility about how much to disclose. So far, among privately-held buyout shops, Terra Firma has taken the lead in transparency.