Simon Walker, BVCA Chief Executive
26th November 2008
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When the BVCA asked Sir David Walker to help us to draw up a code on self-regulation about 18 months ago, no-one could have foreseen the financial and economic turmoil we would be experiencing now.
Given the extraordinary developments in world markets over the past weeks and our own Government's pronouncements earlier this week in the Pre-Budget Report, it may seem slightly odd sitting here talking about self-regulation for a small part of the private equity industry.
But, of course, it is precisely the scale of the global financial meltdown, the crisis surrounding the banking sector and the UK's attempts to provide a fiscal stimulus to the economy, that we need to think about regulation and self-regulation more than ever.
"We're going to wipe the slate of regulation clean" - Lord Turner, Chairman of the FSA's comments of some weeks ago still resonate...... For sure the tide has turned.
There are not only threats of new regulation coming from national governments but also out of the EU and other international bodies. The pressure isn't going to be laser-focused on private equity as it was at the Treasury Select Committee in the UK in the summer of 2007. It'll be much wider - aimed at the whole banking and finance industry.
In terms of a timetable, next year Charlie McCreevy, ends his term as European Commissioner.
There are European elections in May, and the Socialist Group has already made clear that they will be campaigning for controls on our industry.
So to anyone who says that Walker is yesterday's story and we don't need to bother about it, I would say, on the contrary, regulation is the story of the next two years of our lives.
So, in this country we need to make a success of Walker more than ever. And, in Europe we need to develop a strategy that limits the damage done. What I'm going to do tonight is :
- go back to what Walker was trying to achieve
- look at how we have done in the last year since his Report was published
- tell you what else we are doing - going forward, especially in relation to Europe
Why did I think the industry was right to ask Sir David to carry out his Report?
First, the industry couldn't carry on hiding away - given the size of the deals that were going on and the impact they were having on the economy. We had a duty to employees and other stakeholders to explain what we were up to
Second, I felt very strongly coming in from outside the industry, that the more we explain what we do, the more people will come to understand that private equity is a "force for good"
So there was a defensive reason for needing to do Walker. But, also a positive reason. Personally, I felt it was something that we should have been doing in any case, irrespective of whether there was a threat of regulation hanging over us
I also quote Paul Myners: 'Private Equity is more likely to prosper if the industry has a positive image which will encourage others to invest and deal with it and not cause alarm to employees, trade unions, suppliers, customers, regulators or legislators.'
What Walker recommended:
In a nutshell, that the largest private equity firms should disclose a lot more information along the same lines as the information disclosed by a public company
Any PE firm with a portfolio company which:
- has more than 1,000 full-time employees in the UK
- generates more than 50% of its revenue in the UK
- and which had an enterprise value at the time of purchase of £500 million or where the market capitalisation together with the premium for acquisition of control was more than £300 million
Those portfolio companies should produce an Annual Report and financial statement which would be available on the company web-site. It should tell people who the private equity owners are, who the senior management team is, and include information about the company's employees, environmental and social issues along the same lines as would appear in the Report of a public company.
Private equity firms covered by this criteria should themselves produce an annual review - again freely available on their web-site - setting out their values and providing information about governance, management, performance and so on.
In addition, David Walker argued that we needed to provide a lot more information about the overall performance of the private equity industry by carrying out more research.
He also recommended putting in place a monitoring regime to make sure that the industry did what it said it would do. It seemed to me then - and still does - that Sir David came up with a very well-judged package of proposals
It was not indiscriminate in its approach, but focused on the areas of greatest public concern. It demanded of large private equity houses that they make a significant move towards greater transparency, but didn't push them so far that they decided they would be better off moving to another jurisdiction
The past year
Walker was a year old last week! 20th November. So what have we done?
From a standing start, we have achieved a lot.
We've got a heavy-hitting Chairman, Sir Mike Rake, and a Board with a majority of independents, including a former leading trade unionist, Jeannie Drake. We had some good debates in the early days as to whether it was wise to have a Board which was 'too independent'. To my mind, it was absolutely right to have someone like Jeannie Drake on it. To give credibility. And as pressure for regulation increases, the wisdom of that decision will be even clearer
32 private equity firms signed up, of whom 29 are BVCA members
56 portfolio companies
Two things are interesting about who has signed up so far:
1. No one who should have signed up hasn't signed up
- but there are quite a few firms who have signed up who are not strictly speaking covered by the Walker criteria: e.g. HBOS, Macquarie and PAI.
2. DIC has joined the BVCA in order to sign up
And, on portfolio companies, Terra Firma would strictly speaking only have 4 portfolio companies which are covered by the Walker criteria, but have opted to disclose information on 8 of their portfolio companies in line with Walker.
Or, take Cinven : they initially provided information on 4 of their portfolio companies as required by Walker. Having done that, if you look at their excellent web-site which I thoroughly recommend, you will see that they have chosen to go way beyond that and voluntarily disclose information on all 20 of their portfolio companies. We have appointed PricewaterhouseCoopers to help Sir Mike Rake's Group monitor compliance so that there is further independent corroboration - They are currently checking conformity and will be presenting to the GMG in the next few months.
We have also brought in Ernst & Young to collate information on attribution analysis so that we have some proper data to show us whether and how private equity creates value.
Equally, the impact of Walker is spreading into Europe -
1. Denmark has introduced a scheme based on Walker criteria
2. France has made a statement of principles;
3. Sweden has issued draft proposals.
4. And, Germany has recently finalised its proposals. Where next? What are our priorities on Walker?
1. Get more private equity firms and their portfolio companies to sign up
2. Look for other firms who may not strictly qualify but who can see advantages of signing up - e.g. US pe houses
The GMG is to publish its first Annual Report towards the end of the year/early next - which will highlight the extent of conformity and make recommendations.
But that is almost the easy bit.
Europe
If you read what Poul Nyrup Rasmussen, President of the Party of European Socialists, says about private equity it's clear what his objective is. It is to strip private equity of all the flexibility that private ownership brings and treat it as though it is exactly the same as any public company. Once you have got private equity neatly into one regulatory framework, all tied up with red ribbon, it is much easier subsequently to turn the ratchet.
So, what are we doing in Europe?:
First we need to be actively engaged. Alongside EVCA, we've set up a task force and have made an initial submission to the European Commission (details of which are on our website and EVCA's).
This is the start of a sustained engagement between the European private equity industry and European policymakers. A more detailed submission will be produced by March 2009
Second we are bringing together the economic and financial data, which shows the industry's effectiveness. Roger Kelly, who has just joined the BVCA from the Bank of England, as our Chief Economist, is working on that now, and it will be delivered to the commission.
Third, we are separating ourselves from hedge funds, investment banks and other popular targets for political rage. We need the focus on what framework is appropriate for our industry not how governments can bring the financial sector to heel. This was my main theme at the three party conferences in the autumn and since then I have been in Brussels talking to the Liberals economic advisers banging that drum too.
Fourth we are beginning to work actively at the European Parliament level through the national associations, and especially using practitioners and deal doers, so that MEPs realise there is a constituency in their home country to whom private equity is important. We need to bring examples like TPG's work with Grohe to show that private equity rescues businesses and saves jobs.
When I spoke at the GMB Union conference in Plymouth I got a lot of nods in the audience when I said that if Jon Moulton's bid for Rover had been allowed to succeed we might today have a British owned car industry.
Fifthly I think we need to be sending out new messages about what private equity can do in the wake of the financial crisis. How this industry is one of the few sources of capital, and how fixing and repairing broken businesses is going to be absolutely crucial now the real economy is struggling.
We are never going to get the politicians to embrace us. That has never been my goal. What we need is be put us on the back burner, be seen as a second order problem....something they want to get round to but not a clear and present danger.
Conclusion
With the economic challenges we now face, I know that the focus is much more on business problems than on levels of disclosure. But personally I don't think we should take our feet off the pedal on disclosure.
There are three lessons from Walker that I would leave you with:
- First, we were right to move on these issues in our own time than have them forced on us
- Second, there is nothing to fear from greater transparency - indeed the more we tell our story, the more our role will be understood and appreciated
- Third, if we leave a vacuum others will fill it. In this country so far we've kept control of our own destiny rather than letting others impose their views on us!
