The kings of private equity are better at making money than making friends. Reviled in Europe as the spawn of Gordon Gekko and pilloried in America for paying nugatory taxes
, they have an image problem to match their bank balances. Efforts to be seen in a more favourable light—such as the formation of charitable foundations and industry groups that tout the economic benefits of buy-outs—have been of little help. Hence the interest this week in a British report that will lead to the industry’s first serious stab at self-regulation.
The review was commissioned by an industry group and led by Sir David Walker, a former banker and regulator. A version of it is expected to be adopted as a voluntary code of conduct in Britain once private-equity bosses have debated its recommendations, possibly in November.
The industry, says the report, has allowed itself to be viewed as “needlessly secretive”. This remains the case even as some private-equity firms rush to go public, particularly in America. Sir David suggests that their British peers be made to provide annual reports and that the companies they own should report every six months. Each review would include information on the top partners, the performance of their funds, their fees and an indication of who their investors are. The report also urges buy-out barons to consider appointing more external directors to companies in their portfolios.
Disclosure is a bigger issue in Britain than in America, where any company that issues publicly traded debt has to file wodges of financial information with the Securities and Exchange Commission. Private equity bosses reckon they have already lost the battle over disclosure. Big investors, such as CalPERS, have for some time been posting on their websites the performance of funds in which they are limited partners, for instance.
Sir David maintains that voluntary guidelines could be a useful first step in heading off legislation. “We need to do whatever it takes to get away from the appearance of an industry being dragged kicking and screaming into the open,” says the head of one buy-out firm.
But there may be limits to what the industry will accept. One worry is that private-equity firms will find themselves at a disadvantage to other kinds of private company, such as those owned by families or individuals, which won’t be expected to adopt the new code. The call for more external directors has also caused agitation. Private equity is widely seen as having solved the “agency problem” of public companies—executives looking after their own interests rather than those of shareholders—by encouraging managers and owners to work closely with clear objectives. Hiring more outsiders might dilute this advantage by, as Josh Lerner of Harvard Business School puts it, “replicating the pathology of the public board.”
Sir David insists this is not his intention. He has in mind experienced industry professionals who would want to work closely with insiders on turnarounds, not fully independent directors more interested in providing checks and balances than profitable ideas. “We must be very careful not to take the public-company model as our benchmark,” he says. Perish the thought.