The Economic Impact of Private Equity in Europe

SJ Berwin

4 minutes to read

The Economic Impact of Private Equity in Europe

There is an unanswerable case for the European private equity industry to engage more with the press, politicians and the wider business community - and it has made great efforts to do that in recent years. Private equity is now much better understood than it was a few years ago, but recent calls for even more engagement will not go unheeded by the industry's representatives. In fact, only this week, in a meeting with politicians in London, the British Venture Capital Association (BVCA) re-affirmed its commitment to that process as it unveiled the results of its latest survey on the economic impact of private equity. Among the highlights of the survey, by the way, were faster employment growth among private equity backed companies than in the publicly-quoted sector, and a higher rate of export growth and investment. All other national associations, and the European Venture Capital Association itself, have such campaigns at the top of their agendas too.

Quite rightly so: the public does have a legitimate (and healthy) interest in what such an important industry is doing. But, while satisfying that interest, the asset class also has to dispel one very stubborn myth about itself: that it is secretive. So far as the relationship between investor and fund is concerned, there is no more transparent asset class. Private equity fund raising processes involve extensive due diligence by sophisticated and habitual investors, who have access to a wide range of information about the fund and its manager before investing. Once raised, the fund's managers understand a huge amount about the fund's investments, themselves spending significant time (and money) on detailed pre-deal diligence, and remaining highly active investors afterwards. Much of this information is shared with investors on a regular basis in detailed quarterly reports and investor gatherings. Investors could not get much more information about the current state and future prospects of their investments.

But how much of that information should be shared with the world at large? The starting point has to be: not all of it. Precisely because reports to investors are so detailed, much of the information is confidential and commercially sensitive, and it could be damaging to the fund's portfolio companies and its own investors if it were public knowledge. If reports were completely open, managers could not report to their own investors in the way that they have in the past - and that would be a retrograde step indeed.

It is for that reason that there has been some concern about "open record" laws in the US, and now also in Europe. Since the beginning of 2004, public bodies in Britain have been subject to laws requiring them to make disclosure of information on request, unless one of a number of exemptions applies. Since many public authority pension funds invest in European private equity, there has been debate about the ambit of those laws, and the level of information that those investors could be forced to make public.

A recent decision of the Information Commissioner - the UK's independent watchdog, and the first port of call for disputes about the law - has not helped to reassure funds that their confidential information is safe in the hands of these investors. Although the decision related only to "fund level" information - data about a pension fund's commitment to particular private equity funds, and their performance to date - the way in which the Commissioner approached the carve outs from the exemptions was not very sympathetic to the industry. That decision is subject to an appeal, and developments will be watched with interest.

It is not in anyone's interest - the private equity funds, the pension funds, nor their beneficiaries - for the open relationship between a fund and its investors to be bust open completely. The result of that could be less disclosure between investors and funds, and could even result in public bodies being denied access to top performing funds. Not everyone will understand that logic - and may regard resistance to fuller disclosure as an excuse for something more sinister. But it is not, and the industry has to stand its ground.

1 December 2006

www.sjberwin.com