RSS feedsOne of the most significant changes in the corporate landscape of recent times has been the move away from – perhaps ultimately the demise of – the quoted company, thanks largely to the rise of regulation and the re-invention of venture capital as private equity. Until last summer’s credit crunch it seemed no corporate was too big to be taken out of public ownership.
This switch from the model of many owners to one has had implications for corporate reporting. One of the differences in style that private equity introduced into the reporting model was a re-invigorated and refocused management reporting process. This starts even before the company is bought by private equity funds. Talk to accountants who perform due diligence and they point to the different requirements of private equity versus a trade buyer. The difference can be summed up in one word – cash. In contrast to traditional due diligence, private equity want to know about issues of liquidity – how much cash and when?
Those who have worked in the finance departments of companies pre- and post-takeover by private equity also testify to the change required in the nature and volume of the regular management information required. Private equity requires more data in more detail cut in every way known to man. Those who produce this information seem confident that the fruits of their labour are not shoved into a drawer, but are used to understand the business and continue the quest for extra profit, innovation, greater value and cash. Indeed, one criticism a finance department raised was the slightly tedious aspect of the private equity owner suggesting ideas to improve the business that others knew from previous experience wouldn’t work.
The fact that large private companies could exclude themselves from external reporting regimes didn’t used to matter. However, the rise of corporate governance in the 1990s was not driven purely by the clamour of shareholders for better and greater disclosure, but increasingly to satisfy the demands of other stakeholders – employees, customers, suppliers and lately particular concerns such as the environmental lobby. It was the way that these other stakeholders perceived the economic significance and disadvantage of private equity which led to suspicion and distrust of private equity. The proposals of the Walker Report – finalised at the end of 2007 – extend the financial reporting tent to include large private equity businesses. Large is a high hurdle: more than 50% of revenues generated in the UK; more than 1,000 full-time equivalent UK employees; and for take-private transactions, a market value at the time the deal was struck in excess of £300m (for a non-market transaction the figure increases to £500m). Tick all those three boxes and the company has to comply with the Walker guidelines. Also under the code, the private equity is asked to “communicate promptly and effectively with employees, particularly in times of strategic change”. It is hard to see a meeting of minds between workers and bosses on that phrase.
When the British Private Equity and Venture Capital Association (truncated as BVCA) published its report, it said it would take time to put the appropriate processes in place and promised that a group to monitor and review the guidelines would be set up early in the new year under the guidance of ex-KPMG and now BT chairman, Sir Mike Rake. Whether that monitoring includes checking compliance by individual companies is unclear. In February, the BVCA was describing the arrival of the group as imminent.
As for the disclosures themselves, they are symbolically significant rather than onerous. As the Walker report itself says, the guidelines will not call for numerous disclosures that are “in place and specifically appropriate” for quoted companies such as quarterly earnings statements, nor do they include any specification as to corporate governance of portfolio companies beyond calling for a description in the annual report of the composition and relevant experience of the board.
The guidelines call for a business review that conforms more or less to the provisions of section 417 of the Companies Act 2006, including sub-section 5, which is usually applicable only to quoted companies. The guidelines say that the report and accounts should be published no more than six months after the company year-end (a longer period than the four months envisaged in the July consultation document, and in line with the provision for AIM-listed companies) and that a summary mid-year update should be placed on the website no more than three months after mid-year (as against the delay of only two months envisaged at first).
The private equity industry hopes it has done enough to calm public disapprobation. While credit crunches and recessionary fears have knocked private equity off the top slot as the latest unacceptable face of capitalism, it will be interesting to see whether, in the medium term, this example of light-touch, self-regulation will satisfy the private equity critics.
