The private equity sector is thriving, but the noise around it is challenging. Politicians are considering their policy options; the media accuses the sector of socialising losses while privatising profits; and boards of publicly listed companies mutter about the risks of value destruction caused by private capital, with skewed incentives.
Those generalisations are sweeping, but based on soundings we have taken, they reflect broadly held views from stakeholders outside private equity. The industry has shown little desire (or ability) to fundamentally address the criticisms. It may be that an opportunity is at hand.
Towards the end of 2021 the Private Equity Reporting Group (PERG) announced that the Walker Guidelines would undergo ‘a wholesale review’ in 2022. It was a reminder that for the last 14 years the private equity industry has essentially marked its own homework when it comes to disclosure and transparency.
The Walker Guidelines were written as a response to the reputational heat the private equity industry faced in 2007 from politicians, media and trade unions. Private equity is not currently under the same scrutiny as it was in 2007 but the mood music is not encouraging.
It is a politically opportune time to target the sector. A Conservative government that can stomach a NIC rise that will impact middle-income earners, is unlikely to be too squeamish about reviewing the tax treatment of carried interest. The media are only too willing to write reports that PE-owned supermarkets are charging their customers more than their publicly listed peers, just as those same customers are facing a soaring cost of living. Against that backdrop, allowing the industry to self-regulate is almost anachronistic.
Industry self-regulation can work well, as the pharmaceutical sector has proven. The Association of the British Pharmaceutical Industry has developed a Code of Practice that was fully adopted by the industry and is regarded as highly effective. The Code defines the professional, ethical and transparency requirements expected of members. A key feature of the Code’s effectiveness is that it is championed by those at the very top of the industry. Senior managers educate their staff on Code requirements and its importance to their ongoing licence to operate.
As currently drafted, the Walker Guidelines provide some measure of disclosure and transparency, but the emphasis is on portfolio companies, with limited attention on the general partner. According to PERG’s own compliance checklist, 20 of the disclosure requirements relate to portfolio companies, but only 11 requirements relate to the general partner.
This is disclosure by distraction. If the sector wants to be better understood, it needs to allow in more light. The industry could use the review to adopt meaningful change by developing Walker into a framework that analyses the social and economic impact of a GP and its portfolio.
If the industry is to avoid incurring greater wrath from external stakeholders, it should reframe the way it approaches how it creates value. Demonstrating financial value could be achieved through disclosures and transparency that relate to the general partner’s and the portfolio’s strategy, performance, and include key metrics such as debt.
Going beyond the P&L, social value would be demonstrated by laying claim to the good the general partner and its portfolio achieve. Giving greater insight into net-zero ambitions, or approaches to levelling-up, would change how external stakeholders – those outside the industry – perceive private equity. Given the extent of ESG transparency required by limited partners, many general partners already have this information and disclose it, but only to their own investors.
Greater public disclosure and transparency around social and financial value may well feel awkward and uncomfortable, but it does not necessarily represent as much of a leap of faith as it first seems. There is a lot of disclosure to LPs and even more disclosure for those firms pursuing IPOs.
The industry is lucky to have got away with light touch regulation so far. That may not last, given current socio-economic issues. A wholesale review of the Walker Guidelines should be adopted by the industry as a moment to reset its relationship with society, before punitive action is taken against private equity. It would be ironic if missing the opportunity posed by the review of Walker led to the type of regulation that the Walker Guidelines successfully headed off fourteen years ago.
Anthony Silverman is a founder partner of strategic communications advisory firm Apella Advisors