Private equity takes dim view of disclosure

By Martin Arnold

Published: April 12 2008 05:21 | Last updated: April 12 2008 05:21

Private equity’s initial response to Sir David Walker’s voluntary guidelines on transparency can be split into three: the dull, the slack and the angry.

The glossy annual reviews emerging from several bigger buy-out firms, with Bridgepoint the first to publish, have met a mixture of applause and jeers.

This stab at transparency has been sensitive and awkward for an industry with a traditional attitude of “private equity means private”.

The first attempts at disclosure fall into three camps.

The dull, such as Permira, which clashed with unions over its buy-out of the AA motor repair service, have embraced the guidelines and produced bland but informative reviews, in line with Sir David’s recommendations.

The slack, such as Kohlberg Kravis Roberts, which last year completed a UK record £11bn ($22bn) buy-out of the Alliance Boots pharmacy chain, are yet to produce a response, but say they will do so soon in compliance with Walker guidelines.

Industry on the defensive Private equity has been on the defensive since trades unions – notably the GMB – launched a campaign against them last year over the sacking of workers at Birds Eye, the frozen foods company, and the AA. Private equity bids for J Sainsbury and Alliance Boots, the high street retailers, added fuel to the fire, as unions, media and politicians asked why so little was known about an industry employing more than 1m people, 8 per cent of the UK workforce. Coming just as leading buy-out executives were being dragged before a Treasury select committee inquiry into the industry, the furore prompted calls for transparency. In response, the BVCA trade body asked Sir David Walker, the City grandee, to produce voluntary guidelines.

The angry – or more specifically Guy Hands’ Terra Firma, the owner of EMI – seized on the disclosure process as a chance to vent spleen about British tax changes, distracting attention from the rest of its annual review.

In fairness to Mr Hands, Terra Firma’s report was more informative than most. But with other countries – led by Sweden and Denmark – preparing a version of the Walker guidelines for their own markets, the response of buy-out firms has left critics demanding more.

Union leaders, at the forefront of the recent campaign against private equity, complain the Walker guidelines are too lax and the response little more than “blind man’s bluff” designed to “hoodwink” the public.

Paul Maloney, senior AA organiser for the GMB union, which spearheaded the campaign against Permira at the AA, says: “I have looked at the Permira [annual review] that came out and all it is doing is blowing their own trumpet.”

He complains there is no detail of the debt raised by the AA, which recently merged with Saga to create Acromas, a travel and insurance group, or of “contingency plans” to handle an economic slowdown that could hit jobs and profits. However, Acromas plans to publish details of the debt separately in a few months.

The union criticism may confirm the worst fears of buy-out executives, who suspect they have stepped on to a “slippery slope”, leading inevitably to calls for disclosure on more sensitive subjects, such as deal profits and executive rewards.

John McFall, chairman of the Treasury Select Committee, which plans to resume an inquiry into private equity next month, says the industry still needs to win over doubters. “The question of whether this is financial engineering or real operating improvements that add value to the economy is yet to be answered,” he says.

The buy-out industry’s supporters say it has addressed the main complaint of its critics: that an increasing part of the UK economy is in the hands of companies that are a mystery to stakeholders, staff, customers and suppliers.

The reviews, such as one from Doughty Hanson, owner of the troubled 20:20 mobile phone distributor, include details about the private equity firm’s top executives, their type of investors, the companies they own, and their strategy. They also discuss the firm’s market outlook and social and environmental approach.

Simon Walker, head of the British Private Equity and Venture Capital Association, which commissioned the new guidelines, says: “I am pretty happy with what I have seen so far. Provided people meet the basics, I expect to see the same diversity that you see in public company reports.”

“I think I knew far more about Terra Firma after reading their report than I did before,” says Mr Walker. “My attitude is let a hundred flowers bloom.”

Terra Firma says it spent £250,000 on producing its 120-page review, including details of executive remuneration – the top 15 managers received £665,053 each on average and all staff invested €200m in its latest €5.4bn fund.

It also included a balance sheet, showing Terra Firma had €5.5bn of investment assets, and a profit and loss statement, explaining that partnership expenses were €30.2m last year. None of these were required under the Walker guidelines.

Other firms aim to go beyond the guidelines. Cinven, which last year bought Bupa’s UK hospitals business, intends to publish information on all portfolio companies, whether UK-based or not.

Some big London-based buy-out houses own few companies in the UK, such as CVC Capital Partners and TPG Capital, which has a minority stake in Debenhams, the department store.

These say they will update their websites – TPG’s is still a bit bare – which Sir David left as an alternative to an annual review.

The Walker guidelines will probably make a bigger splash when annual reports are published soon by big private equity-owned companies, such as Alliance Boots, EMI and Acromas.