Friday Letter: Walking the walk

With the SVCA’s Code of Conduct, Swedish GPs have made an important commitment towards more openness. The challenge now is to be seen to deliver

The news in the UK this week that wealthy individuals teamed up with global banking group HSBC to avoid paying millions of pounds in tax, was not exactly the best advert for the City, or for the financial services sector in general. To many ordinary citizens the sector and its participants seem to occupy a parallel universe in which different rules apply. True or not, this perception is winning a growing number of followers and the private equity industry is in no way immune to its implications.

That’s why it was encouraging to hear this week that the Swedish Private Equity & Venture Capital Association [SVCA] officially launched its Code of Conduct and Supervisory Board in a bid to strengthen accountability and confidence in private equity firms as company owners.

Sadly, public confidence in private equity as a positive force has diminished in Sweden following a number of private investments that attracted negative press coverage. KKR’s and Triton’s investment in elderly care home group Carema was one of the deals that the mainstream media alighted upon. In November 2011, the firms came under fire after Carema was accused of neglecting patients and criticised for its tax and remuneration practices.

Certainly not all of the stories about Carema were correct – and KKR was keen to stress that when PEI asked about the investment at the time. “Since we have invested in Carema, we have never taken one cent out of the company; there have never been any dividends, all the revenues have been reinvested,” Henrik Kraft, leading KKR’s operations in the Nordics, told PEI in 2013. A Triton spokesperson told PEI at the same time: “There were a few instances where Carema didn't live up to quality standards, something for which both owners and company publically have apologised for.”

Nevertheless, the damage was done. During last year’s election campaign in Sweden, left wing politicians called for a ban on all private investments in welfare sectors. There’s currently an investigation into whether such a ban should indeed be imposed, but the results of this inquiry won’t be published until 2016.

This has led to huge uncertainty for GPs in Sweden, including EQT which owns the largest private school in the country. Because of the inquiry it is impossible to value the business, Thomas von Koch, EQT’s managing partner told PEI last November. “The effect of the investigation is that every bank is calling their clients invested in these [welfare sector] companies saying: just so you know, your credit facility will run out in six months’ time. The investigation is a decision by itself.”

So you can see why GPs in Sweden are keen to restore trust in private ownership – and have hence launched this Code. There is no doubt that reputational issues can be very damaging – and suspicion about private equity can also hurt deal flow. Much of the Code therefore addresses the need for transparency and engagement with stakeholders. The Code orders GPs for instance to have a website containing contact information and details about the ownership structure of the firm. Queries from both the media and the public should get a prompt response. The Code also urges GPs to behave responsibly when it comes to their tax affairs by not actively avoiding tax.

The latter point however immediately illustrates the biggest problem of the Code: it doesn’t have any enforcing powers. Complaints can be made – by anyone – to a three-person supervisory board set up under the SVCA's auspices, which will assess whether GPs have acted as responsible owners. The board can also issue warnings to GPs, or in extreme cases recommend that the firm should be expelled from the association, a final decision of which would be decided by the board of the SVCA.

Also, because the Code is there to prevent bad ownership behaviour, assessing its results will be very difficult. If the Swedish public in a few years’ time doesn’t feel that the Code has done anything meaningful, then it will be easy to dismiss it as a lame duck, or label it a gimmick.

It’s also worth keeping in mind that there are still GPs in many markets refusing to talk to journalists or other stakeholders about investments in businesses that play a significant role in society. That code of silence will do little to dispel suspicions.

So the release of the Code should be applauded, even if its impact remains hard to predict. The fact that GPs have recognised the need to be more transparent about how they bring value to Swedish businesses – and not to flinch from the unexpected and unwelcome – is something the industry as a whole should acknowledge and emulate. Let's see GPs walk the walk.