Cicero Policy Briefer

Issue 17, October 2007

Transparency, Disclosure and Responsible Investing: Private Equity in the Vanguard

By Javier Echarri, Secretary-General, European Private Equity and Venture Capital Association

This September, the European Private Equity and Venture Capital Association (EVCA) launched a public consultation for a new international industry Code of Ethics, based on the International Organisation of Securities Commission (IOSCO) model. This is intended to not only maintain and enhance existing EVCA industry standards, but also support an environment of openness and trust between EVCA member firms and the wider stakeholder community.

EVCA’s 1,199 members represent all main industry participants, from fund management companies to banks, pension funds, and insurance companies, professional advisors and national (European) Trade Associations. The new Code of Ethics will be compulsory for EVCA full members, who represent over 80 per cent of the private equity and venture capital under management in Europe.

The Code itself is based on six ethical principles, including integrity, fairness, keeping promises, confidentiality and responsibility. The final version is expected to be ready by January 2008, with EVCA full members using the following twelve months for implementation.

Although this work may sound admirable, the question that may be asked by some responding to the consultation may be—why now?

For nearly three decades, EVCA has supported the development of professional standards which, among others, aid industry transparency through internationally accepted valuation and reporting guidelines, and have seen OECD-derived Corporate Governance guidelines and additional principles-based codes of conducts, put into place 1. This is in addition to EU legislation governing financial services, and the individual demands made on the private equity industry by each and every national regulator - particularly true for the UK. Taken together, supervision of the industry is already extensive.

However, EVCA and its members are fully aware that the recent rapid growth of the industry has led to criticisms of its activities, and that a healthy, pragmatic debate is needed. As a result the Code of Ethics consultation is a fully open, public exercise, and EVCA is actively encouraging all industry and social partners, including trade unions, politicians and regulators, to comment 2. Heated debates are unhelpful to all, and it is simply disingenuous and short-sighted single out private equity in today’s interdependent global marketplace, as has been done recently.

EVCA did not build its codes due to recent media or political pressure: they have been designed to be, and implemented as, living, breathing standards and are regularly updated to reflect market and legal or regulatory developments. They aim to build stable, long-term relationships with institutional investors and regulators and to increase overall transparency and trust in the asset class. They are also designed to be multi-jurisdictional and applicable to a wide range of situations, circumstances and different investment stages. As a result they are the most advanced professional standards of any alternative asset class anywhere in the world.

The Code of Ethics consultation largely refers to the implementation of policies to govern the behaviours of the private equity industry, rather than looking at the process of disclosure individually. Moreover, the new EVCA Code of Ethics is very much in line with the work of the UK Walker Working Group, in reinforcing professional standards of the industry, of which it is designed to be a key element. Over the past few months, EVCA has kept its own work on disclosure on hold and concentrated on responding to the UK Walker Review on transparency and disclosure in private equity, and will issue its response on 9 October. After carefully analysing the final conclusions, EVCA will then decide if it is appropriate or if it requires a pan-European response.

Private equity and venture capital are, at their heart, about energising companies to be globally competitive, and building strong returns for long-term investors. Investments by the private equity and venture capital industry into European companies amounted to some 71 billion euros last year alone, with over 93 per cent of all industry activity within companies that have under 500 employees. Given this, it is only right that the draft Code states that private equity portfolio managers should conduct their activities with due regard for a wide variety of interested parties, including investors, regulators, suppliers, creditors, employees and the wider community.

However, we should also not lose sight of the global, fast moving nature of today’s financial markets and economies. When fully in place, the Code will mean that all areas of business in the private equity and venture capital industries are covered by self-regulation, on a principles-based, efficient and strong model of governance which is applicable not only in the EU, but around the world.

EVCA and its members are fully open to seeing how its industry professional standards can fit with initiatives launched by regulators to provide confirmation of such industry guidance as an approved, global standard.

1. For more information on EVCA’s comprehensive professional standards please click here.
2. The new EVCA Code of Ethics is open for public consultation via a special web site from 26 September until 26 October 2007 . For more information please click here.

Javier Echarri is the Secretary-General of the European Private Equity and Venture Capital Association (EVCA). Established in 1983 and based in Brussels, EVCA promotes, facilitates and represents the needs and interests of the private equity and venture capital industry in Europe. EVCA has 1,199 members in 50 countries, including the leading fund managers in the European private equity and venture capital industry. For more information please visit www.evca.com.

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