Friday Letter: More scrutiny

This week, as media coverage of the private equity industry in the UK hit fever pitch, the BVCA has made what it hopes will be its killer move to still the dissenting voices that would see the industry dramatically constrained.  

The UK trade body has launched a working group, to be chaired by City grandee Sir David Walker, which will look at how the industry can become more transparent.

The BVCA’s intervention in the debate is timely and well-intentioned, though it will have to manage some smart footwork to ensure it moves beyond a window-dressing exercise for the big buyout boys.

Certainly, the will is there. In a joint statement, the 23 firms backing the initiative said the industry was proud of its achievements and its recent growth, but accepted that more transparency was required. It said: “We believe there would be real benefit to all stakeholders if a regime of more effective disclosure took hold. This is why the industry is committed to undertaking this review”.

Most of the UK’s biggest buyout firms are supporting the exercise. Interestingly and crucially, some of the smaller mid-market operators have also rallied to the cause. Lyceum Capital, ISIS Equity Partners and Hermes Private Equity stand side-by-side with KKR and TPG.

It will be interesting to see how the working party reconciles the two groups’ differing needs without either watering down its conclusions or making the demands on small firms too burdensome.

Privately some general partners of mid-market firms are furious they are being dragged into the debate. As far as they are concerned were it not for the likes of Permira and their big, high profile deals they would still be happily off the radar.

One such GP told PEO this week: “What we do is entirely different. Mostly when operating in the mid-market you are buying into top line growth. At exit you have to show you are selling a growing company, not just a growing profit. In this debate, there is always a danger we get tarred with the same brush as the mega funds.”

As such it is probably wise that mid-market managers are included in the BVCA working party. But it is difficult to see how keen they will be to be directly aligned with the efforts of Permira and its portfolio businesses.

Take the car recovery business, the AA, which merited only a couple of pages in Centrica’s annual results, when it was part of the UK utility. Now owned by CVC Capital Partners and Permira, the AA published a detailed 56-page document this year, containing a consolidated profit and loss statement, a chief executive’s review and much more. It was the kind of report you’d produce if you were listed.

That level of detail does not come cheaply, but it may not ultimately matter. At its heart the debate in the UK (and the rest of Europe) has been political. And this week the UK Prime Minister Tony Blair, the Prime Minister-in-waiting Gordon Brown and his acolyte in the Treasury Ed Balls all came out in support of the industry for Labour, while George Osborne, the shadow chancellor, made reassuring noises from the opposition Conservative party.

Today, any significant changes to the UK tax regime – recently demanded by the unions and a few recidivist Old Labour politicians – look to be dead in the water. So long as the industry shows itself willing to communicate when asked.

A credible working party to investigate increased transparency should be able to affirm the industry’s legitimacy in the eyes of the establishment. That said, whatever conclusions Sir David Walker’s committee come to, it is certain to stop short of the two issues the firms really care about: what they charge and how much they pay themselves.

The Economist this week dismissed concerns about general partners’ riches as “motivated by prurience and envy”. But that doesn’t make the scrutiny any less intense or significant. The mainstream media will make a point of rummaging around in private equity firms’ back yards and will be quick to judge when partners’ wealth is deemed excessive. In this regard there is a peculiarly European (as opposed to North American) flavour to the current debate. Because in Europe the power of capitalism can seem to stray far more quickly into excess.

PS: In what may seem a sweet irony, PEO and sister publication PEI have just released the results of our annual industry poll to find the people and firms of 2006. Click here for the results.