Behind the curtains

Despite high-profile bids for Sainsbury's and Alliance Boots, the private equity industry is still misunderstood, but does it need to improve its transparency?

Despite high-profile bids for Sainsbury’s and Alliance Boots, the private equity industry is still misunderstood, but does it need to improve its transparency?

Private equity is in the headlines thanks to recent bids for Sainsbury’s and Alliance Boots, yet the industry is much misunderstood. But does this mean it needs to improve its transparency and disclosure methods to boost public confidence?

Private equity may have finally found its place in the public consciousness because 2007 looks to be the year in which the industry gains maximum exposure. The ongoing news that many well known and loved household names are potential buy-out targets, in addition to the sheer size of some of the deals completed, has directed the attention of the media and the trades union to the market.

Although the media coverage is constant and increasing, it is still evident from this that private equity is not fully understood by many, with allegations that it is a secretive and unaccountable industry. As a result the question is consistently raised: is there a need for greater transparency and disclosure on the part of private equity firms?

The debate about private equity has been conducted at the level of broad generalisations which does little to enlighten the general public of the favourable impact private equity has for the European and world economy. In order to asses these issues head on, the industry needs to focus precisely on what more they need to do to satisfy society’s legitimate interest in what private equity does and to dispel many of the myths and generalisations surrounding the industry.

First off we should note that the general public – retail investors – cannot generally get direct access to most (limited life) private equity funds. They are illiquid investments and are deemed unsuitable for them by regulators.

Those funds that the public can buy directly – usually liquid funds, listed on a stock market – are obliged to disclose full information about their performance and returns to the public. Those that the public can’t invest in don’t have to. That seems logical.

The general public, though, does have indirect exposure to the sector through, for example, pension funds. Beneficiaries however cannot make asset allocation decisions, they have to entrust such decisions to pension fund trustees and professional asset managers. These skilled and experienced individuals are given much information and receive regular reports about the performance of the pension funds they manage.

The pension fund managers will receive detailed and frequent information regarding the individual investments made in private equity funds in which they participate. It is up to these pension fund managers to determine what level of information they provide to the trustees who are tasked with protecting the beneficiaries interests. Beneficiaries in turn are provided with information regarding their pension funds.

To provide beneficiaries with detailed information regarding each private equity fund in which their pension scheme has invested would be meaningless – bearing in mind what percentage of pension funds’ assets are allocated to private equity and would be information overload. In addition, as it stands in the UK and in particular the United States, freedom of information laws result in the performance figures for many private equity funds (at least at the fund level) becoming increasingly and readily available to those who are interested and there is a general willingness on the part of private equity managers to allow such disclosure.

The question has been raised as to whether private equity managers’ conduct and their way of doing business poses a risk to the wider economy; to the stability of the financial system and to the integrity of the market. It has become clear that many stakeholders feel that they have a need or even a right to receive much more information about private equity-backed companies than they currently get. This builds on the increasing theme of the need and right for information in the industry, and in turn the industry is making significant effort to respond to this.

The issue was analysed most recently by the UK’s regulator and the European Commission, which found that on the whole private equity is already properly regulated and plays an important and positive role in the financial system and the wider economy. That is not to say that it was given the complete all clear as some areas of focus were recognised, but in relation to the need for greater regulation, it was considered and concluded that this was not necessary.

Next is the regulation of large – and indeed middle market – private companies themselves, which is a relevant and weighty issue for wider stakeholders. These are carefully regulated as they are important sources for employment and economic activity. Generally speaking the rules governing quoted and unquoted companies are not different as regards the interests of wider stakeholders. Companies are subject to strict rules that seek to protect employees, creditors and others, and private equity backed companies are – in that respect – in basically the same position as their quoted counterparts.

On top of this, the public consultation and debate that took nearly 10 years on the regulation of companies has resulted in a complete overhaul in the UK. Regulation of all companies was considered carefully, in the context of their role in a modern economy, and new rules were written. We should build on that, not ignore it.

So where does all of this leave the issue of transparency and disclosure in the world of private equity? We cannot deny that the debate on transparency is important, but to be productive it needs to be specific and properly reasoned. It is only then that an appropriate assessment can be made about whether and which changes would be in the best interests of the European economy and it’s many stakeholders.

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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