Sir David Walker yesterday bemoaned investments made by UK pension funds into the private equity industry as he called on the sector to provide better data. He also rejected controversial claims that he expected buyout firms to appoint non-executive directors to their portfolio companies.
Walker, the former chairman of Morgan Stanley International, made these comments at a press conference as he published his preliminary report into transparency and disclosure in the private equity industry. The independent report was commissioned by representative industry body the
“The problem with private equity is that it is perceived to be opaque, there is a sense of secretiveness which generates suspicion and in some places hostility,” he said. “This is a shame when London is a centre of excellence; people should be proud of it especially the cross-border business that it generates. It is the second most important centre for private equity globally.”
To counteract this, the report calls for three areas of greater voluntary transparency and disclosure. These are within private equity portfolio companies, the general partners themselves and the BVCA.
The proposals are targeted at the larger buyout firms with portfolio companies above a certain size, including those formerly listed as FTSE 250 companies, where the equity consideration on acquisition exceeded £300m the companies employed at least 1,000 staff.
Walker called on the BVCA “to up its game”, citing the need for data collection, aggregation and dissemination on an authoritative industry-wide basis.
“Existing LPs are happy with the information they are getting from GPs but why do UK pension funds not invest in private equity?” he said. “The way of addressing this is better data – we don’t have adequate comparable performance data.”
With regards to portfolio companies, the proposals include the filing of an annual report and financial statement on the company website within four months of the year-end as opposed to the current nine-month limit and a short interim statement not more than two months after the half year-end.
Walker reiterated that this would not include information on the personal remuneration of GPs, saying: “GPs and owner LPs have their own arrangements for compensation disclosure, which LPs are broadly happy with.”
However, the report does propose that portfolio companies should disclose information on company board members.
“The portfolio companies should list the composition of the board and a statement of competency regarding each director. The focus here is on the competence of the board not a box-ticking compliance to the competence of the board,” he said.
Although he admitted to being “implicitly critical” of company boards made up solely of executive directors and GPs, Walker said this was not a call for independent executive directors as defined by Sir Derek Higgs.
The report instead referred to the increased use of operational directors with outside industrial experience, whose interests were aligned with management and funds thorough equity incentives.
“There is no room for independent directors in private equity companies. The success for the private equity model relies on shortening lines of reporting between managers and GPs,” he said.
Walker added: “The focus on leverage is much exaggerated. What is important is the structure of leverage – whether it is senior debt or deeply subordinated debt with pay as you can layers. This makes a difference and needs to be put on the website,” he said.
With regards to the actual private equity firms, he called for greater GP transparency, saying: “The unions’ main gripe is that they have no idea who the GPs are.”
The report therefore proposes an annual review and publication of the senior management structure, which Walker admitted would not be popular. It also called for a certain level of attribution analysis by GPs.
“Is the IRR that these companies generate due to leverage or smart improvement?” he asked. “I am asking GPs to give a rough indication of attribution analysis, how much is balance sheet, how much market rise in that sector and how much smart management.”
As yet, the code will not be enforced but Walker warned: “If GPs don’t want to do business in this environment, they should go.”