BVCA Chief Executive, Simon Walker, writes in today's Financial Times
A vast international conference of industry participants might not seem a likely occasion for introspection. Yet this is precisely what is required at the SuperReturn International meeting in Berlin this week, one of the major events in the private equity calendar. In recent years, perhaps understandably, this meeting has enjoyed a heady atmosphere of confidence bordering on celebration. It was a venue where, not long ago, senior figures in private equity wondered aloud whether, or possibly simply when, a $50 billion, even $100 billion bargain might be brought home by one or more of them.
Such stargazing in the current climate would be little short of ludicrous. Absolutely everyone involved in private equity recognises this in an individual capacity and there would be every advantage in acknowledging it collectively. To do so does not mean conceding to critics that the private equity model is "broken". There was never a single private equity model as such to break. Private equity does, however, need to accelerate its renewal and Berlin can serve as a vital step in that process. There are three respects, in particular, in which I think the sector needs to embrace fully the post-leverage era.
The first relates to tone. Senior figures in private equity never asked for, courted, let alone invented the "masters of the universe" accolade which some attached to it. We did not necessarily repudiate such an association with sufficient force either. There were fantastic achievements recorded at the peak of the boom and it is manifestly not the case, as certain camps contend, that debt is the only legacy of that amazing period. Yet private equity would be wise not to claim more than it can deliver. There is a robust argument that its alignment of the interests of investors and management accounts for its tendency to outperform publicly quoted vehicles, but it should not assume the mantle of Moses.
The second element involves conceding candidly that the industry will need to continue to evolve, and quite quickly, to maintain its relevance. The age of easy, even, to be blunt, lazy leverage is over and it is extremely doubtful if it will be witnessed again. Private equity is returning to its roots and concentrating forensically on generating the sorts of structural and strategic enhancements which led to its emergence in the first place. It needs to set it sights on, for example, the improvement in productivity per worker which a recent study by Ernst & Young in conjunction with the BVCA showed can be inspired. This capacity to restructure is crucial in a recession. The industry's transformation can already be witnessed but the pace of change has to hasten further.
The final part is to keep marching down the path towards greater transparency. The introduction of the regime of self-regulation established by Sir David Walker in his 2007 report was undoubtedly a traumatic experience for some in the UK private equity industry, but it has been embraced. The recent first report of the Guidelines Monitoring Group, headed by Sir Michael Rake, the Chairman of BT, along with colleagues such as Jeannie Drake, a former Deputy General Secretary of the Communications Workers Union, outlined in clear terms that private equity was committed to these arrangements and complying with them. It would be a major mistake to conclude from this that the task has been completed or that disclosure is a costly distraction when portfolio companies are operating in such an austere economic situation. There remain influential factions, notably within the European Parliament, who are determined to impose stringent EU-wide regulation on private equity not to reform matters but as a device to destroy it. Relentless openness is the only rational response to the false accusation of secrecy.
If the industry adopts this course of action then it has a bright future ahead of it, albeit one that may be different from that envisaged a mere two years ago. Private equity is virtually unique (in the private sector at least) in having cash on hand and the willingness to invest in business at a moment when that support is truly needed. It is already saving ailing and failing companies and it is in everybody's interest for it to help more of them. It can be a real resource for recovery provided that it adapts to the challenge and is not neutered by crass regulation. There are no "masters of the universe" today. There remains, though, a world which needs the practical skills that private equity can offer.
Simon Walker is Chief Executive of the British Private Equity and Venture Capital Association.
