Cicero Policy Briefer

Issue 19, December 2007

What the Walker Review means for private equity

By Laura Chisholm

Some of the recent criticism of private equity is based on envy of the spectacular monetary rewards that success has brought the industry’s leaders. But much of the criticism of private equity is based more on ignorance, a failure to understand how the industry invests in and builds the companies it owns. This ignorance, as the industry accepts, will only be countered by a sustained communications programme. Envy is harder to address, but targeted redistribution should help and the industry should look at the corporate and social responsibility programmes of large PLCs.

More standardised transparency should help to dispel some of the myths that have built up around the industry. Sir David Walker’s recently published guidelines on this are rigorous and go further than the British Venture Capital Association (BVCA) would have predicted when they established the review in March.

Sir David has proposed enhanced reporting requirements for private equity companies and the businesses in their portfolios. He also recommends an important role for the BVCA in collecting and disseminating credible data which reflects the industry’s contribution to the UK’s economy.

The unions are prone to moving the goalposts during their campaigns, but their two main criticisms of Walker’s report (that general partners will not have to disclose their remuneration and that the code is not on the statute books) are weak. It has rightly been pointed out that requesting details of executives’ remuneration is simply financial voyeurism that should not be indulged. Regulation, to use Sir David’s words, hangs over the private equity industry like the Sword of Damocles. But in any case, the matter of general partners’ remuneration was never in his remit nor, obviously, was he retained to draw up primary legislation.

The latest household name in talks with private equity is Northern Rock. This reveals quite how much economic conditions have changed since the targeting of Sainsbury’s and Boots brought the industry into the limelight at the end of 2006. Clearly we will not be seeing deals of these proportions in the next few months, but this does not let private equity off the hook.

The fact that the Treasury was prepared to hit small businesses and employee share schemes in the pre-budget report just to raise the tax bills of a small number of private equity executives demonstrates the political pressure they were under. The same pressure could yet see the Government act to enforce transparency. How the industry responds over the next year will be critical; the debate will continue with the implementation of Walker’s guidelines being carried out under the media spotlight and organisations similar to private equity companies (e.g., sovereign wealth funds and individuals such as Branson) being brought into the fold.

Even more immediate is the Treasury Select Committee’s inquiry into the industry. We can expect a hearing with HMRC in addition to the one scheduled with Sir David Walker. The Chancellor will also be announcing a package of measures to mitigate the effects of the capital gains tax on small businesses before Christmas. There is no chance of the industry escaping scrutiny, but it might escape censure if it embraces the spirit as well as the letter of its new code on transparency.

Laura Chisholm can be contacted on +44 (0)20 7665 9536 or click here to email.