European Private Equity More Information - Or More Understanding?

SJ Berwin LLP

4 minutes to read

It has been an interesting few weeks for European private equity: unions in London protested at the launch of a charitable foundation established by leading funds, and attacked the industry's investment methodology at Davos; (some) journalists have enjoyed a new bout of private equity bashing, and (a few) politicians have joined in.

None of this is new, or surprising. But there is little doubt that - over time - the intensity of these public rumblings is growing, and the industry knows that it has to respond.

One way in which it has done that was by announcing a two year study of the economic impact of private equity, overseen by the University of Columbia. That study will follow in the footsteps of several industry reports, all of which have demonstrated time and again that private equity creates, rather than destroys, jobs. Indeed, analysis published only this week by AT Kearney demonstrates faster revenue growth in private equity backed companies, and claims that the industry has created over six million new jobs. There is also clear evidence that, on average, private equity funds outperform traditional funds, delivering better returns for the pension funds and other institutions that are their principal investors.

Even though all of this helps, it is not likely to silence those who call for greater "openness". But it is not clear what they want more openness about. More openness by the funds towards their investors? That would be hard, given the already extensive level of disclosure required by most fund agreements, and anyway investors themselves are not asking for it. More disclosure by funds of their own performance? Many funds are now forced (by Freedom of Information Laws in the United States) to allow that information to be published on the internet (by investors like CalPERS, the Californian State pension fund), and it is far from clear that the public takes any notice of it, let alone that it does them any good. More openness by private equity executives about what they earn? It is hard to see any basis on which to justify that (although that won't stop some from asking). More openness by large private companies of their intentions as regards their business strategies, for the benefit of their employees and other outside stakeholders? Perhaps. That could be what some are driving at, with concerns that previously "open" public companies are being moved into a more secretive private world.

But would that concern hold up to closer analysis?

The requirements for private companies to disclose historic information are well established by law: audited annual accounts are heavily regulated and publicly available - and, therefore (at least in theory), available to employees and third parties that might be considering dealing with the company. But the obligation to make disclosure of forward looking information is at a much earlier stage of development.

When the UK re-wrote its company law recently, policy-makers thought long and hard about this (and changed their minds several times), but in the end required all companies except "small companies" to prepare and publish an "expanded business review", with narrative information about the business and its principal risks. But (in compliance with pan-European rules) the requirements are more exacting for quoted companies than they are for unquoted ones. For quoted companies only (which doesn't, incidentally, include AIM companies), the report required is a forward looking one - including, for example, "the main trends and factors likely to affect the future development, performance and position of the company's business".

So (some) publicly traded companies will have to be more "open" about their intentions than private ones. However, the review is explicitly stated to be a document aimed at shareholders, rather than stakeholders more generally, and the amount of forward looking information needed is very limited.

The reality, of course, is that forward looking statements by a company's board are unlikely to say very much that is of practical use to stakeholders. And even without such statements, it is pretty clear - at least in general terms - what the objectives of a private equity fund are going to be for any business it backs. It is no secret that financial investors are looking to maximise returns through an exit in the medium term. In order to achieve that, they will often need to make real and sustainable improvements to the underlying business, and sometimes that will require re-structuring - which may cause short term pain. In this respect, more openness is unlikely to help. Better understanding of the micro and macro economic benefits of the ownership and governance model just might.

2 February 2007

SJ Berwin named Private Equity Law Firm of the Year

We are delighted to announce that SJ Berwin was named Private Equity Law Firm of the Year for the fourth successive year at the European Venture Capital Journal Awards held in London on Wednesday. This comes only a few weeks after the firm was named European Law Firm of the Year for the third consecutive year at the European Private Equity Awards.

For further information please click here.