BVCA defends industry transparency(3)

The UK’s trade association has responded to suggestions from Sir Derek Higgs, a champion of corporate governance, that buyout firms need to increase transparency by highlighting the good relations between the industry and its investors.

The British Venture Capital Association has countered criticism from Sir Derek Higgs, the UK architect of quoted company corporate governance guidelines, who believes private equity firms will need to introduce independent scrutiny into their management and provide more information to investors.

Higgs: issues with governance

In an interview with the Financial Times, a UK daily paper, Higgs said the growth of private equity raised questions about its accountability to investors and its poor record in providing performance information.

Talking to PrivateEquityOnline, a spokesman for the BVCA said: “Those who understand the industry will know there is complete transparency and openness between the private equity business and its investors. The model is extremely efficient and BVCA data shows it has consistently provided superior returns over the medium and longer term. But it is important to remember it is just part of a rounder economy including the public markets.”

Higgs, currently chairman of UK bank Alliance & Leicester and a former investment banker, said in the Financial Times: “There is an issue of how to make sure that the positive benefits of superior corporate governance are aligned with what the private equity people would say are the positive features of the purest form of capitalism.”

He said, however, it might take a business downturn to prompt wider demands for improvements in governance for private equity. Higgs’ 2003 report led to a strengthening of the role of non-executive directors in listed companies.

The industry has long argued that although it is an opaque asset class to outsiders it is entirely transparent to its investors, the providers of its capital. Furthermore proponents of the asset class claim its investment model demands higher standards of corporate governance from its portfolio companies, because of the tight alignment of interest between the private equity firms and the management teams they back on their investors behalf.

But while private equity firms may police their own investments, critics such as Higgs want to know who is policing the firms themselves. In the UK, private equity firms are regulated by the Financial Services Authority, the UK regulator, which is currently reviewing its regime for private equity. A response to an FSA discussion paper issued last Novemver is due at the end of March.