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PE should ‘comply or explain’

Less than two weeks after publishing a set of disclosure and
transparency proposals for the private equity industry, the author of the
report, Sir David Walker, has already suggested that tougher requirements are

Walker, a former chairman of investment bank Morgan Stanley International and
of the Securities and Investment Board (now subsumed into the Financial Services
Authority), was commissioned by the British Private Equity and Venture Capital
Association (which has the truncated acronym BVCA) to research and write a
consultation paper earlier this year.

His recommendations, issued on 17 July, included greater and more rapid
disclosure on the part of investee companies (particularly those of a
substantial size, roughly equivalent to the FTSE-250), private equity fund
managers and the industry association itself. Walker called for a ‘comply or
explain’ approach, but, unlike the regulatory oversight of quoted companies’
adherence to the Combined Code, Walker said that the external scrutiny of
unions, politicians and the media could be “confidently expected to play a part
in seeking and smoking out explanation for any divergence from the guidelines”.

On 30 July, however, the House of Commons Treasury Committee issued a report
on private equity which suggested that more disclosure might be necessary, and
acknowledged the concerns of a trade union which claimed that self regulation
would be “worse than useless: the rogues will undercut the reputable”.

Not far enough

Walker now says that his own recommendations don’t go far enough and that
more information needs to be disclosed by private equity groups as they launch
deals. He told the Financial Times on 1 August that private equity groups will
have to disclose more information about each deal, including:

– Any information on how the transaction will be financed;
– The strategy behind the deal, including any factory closures or job cuts; and

– Information about who will take over as management and board members.

“I think an employee in all these situations has a justifiable interest to
know, ‘is my job security materially diminished as a result of this?’” he told
the Financial Times. He added that he would be prepared to “name and shame”
private equity groups that failed to comply.

But one private equity manager said that he would be uncomfortable announcing
that he had a “buy-and-build” strategy, as this could push up the prices of
target acquisitions.

Walker’s retort to any private equity group that would consider moving
offshore to avoid his requirements was unequivocal: “[Britain] is a place where
we have high standards for doing business. If you can’t live with that, then
sorry guys, this is not the place to be.”

Walker’s consultation paper is looking for responses by 9 October 2007.

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