Principles and practice

The European Venture Capital and Private Equity Association (EVCA) has released a consultation document* entitled “Governing Principles and Sound Practice in the Establishment and Management of Private Equity and Venture Capital Funds.”

Intended to give aspirant private equity fund managers a set of principles and recommendations as to how they plan, fund-raise, invest, exit and distribute, the paper also offers some substantive guidance on how the GP should communicate with its LPs. Usefully, there are explicit sections in what is currently a 50 page paper dedicated to ‘Transparency’ and ‘Investor Relations’.

The EVCA Governing Principles Taskforce was chaired by Simon Thornton, vice president of Landmark Partners Europe. The team included Josyane Gold of SJ Berwin, Barry Lawson (Bridgepoint Capital), Jan Moulijn (NIB Capital Private Equity), Jobst Neuss (European Investment Fund) and Frits van der Have at Life Sciences Partners.

As part of this undertaking EVCA have endeavoured to codify a set of governing principles and as a result the paper includes nine such items. Some have the seemingly benign generality of the homily: for instance, under the principle (number three) of ‘Integrity’ there is the amplification: “A fund operator should manage its business with integrity.” Indeed.

And in case any LP is already muttering about the subjective nature of integrity and what happened to his capital when that venture fund piled into all those dot coms, there's principle number six entitled Investors' interests: “a fund operator should pay due regard to the interest of the investors in the fund taken as a group.”

A fund operator should manage its business with integrity

If this is beginning to seem like a slow walk down a long road then readers should move past the one page of principles and spend a bit of time amongst the initial considerations that have been assembled to illustrate the numerous issues that are embedded in the broad principles. Offering both an explanation of particular thematic questions and detailed recommendations as to how best to deal with the various issues in these questions, the considerations provide some interesting insights into the how the team at EVCA have sought to address some of the key concerns of the investment community.

In this context, the section dealing with transparency is worth a close look. It is summarised as a principle as follows: “A fund operator should pay due regard to the information needs of investors in the fund, and communicate adequate information to them in a way which is clear, fair and not misleading.”

Fair enough, but what about the detail? The recommendations in the paper on transparency are usefully substantive – as the accompanying extract evidences – and the Association endeavours to drive the point home to GPs by highlighting an important operational benefit: “Implementing appropriate [LP reporting] processes will allow the manager to operate more efficiently, by reducing the number of ‘ad hoc’ enquiries that the manager receives from investors.”

If some more sceptical buyside readers are shrugging at what they predict to be a marked gap between theory and practice when it comes to transparency and reporting, the paper also makes clear that a fund's constitutional documents should contain clear provisions as to what the GP must report when and how to its LPs.

Besides recommending that EVCA's valuation and reporting guidelines should be used when reporting on portfolio valuation, the paper urges the GP to specify in the fund's documentation the frequency of the reports, the information therein and the manner of delivery (“e.g. in writing, by e-mail, in secure website.”) “The examples of good practice in the report are intended to provide guidance on some of the issues that arise during the life cycle of a private equity fund and how those involved may address them,” says Simon Thornton.

At this point it's worth remembering that the paper has been drawn up with the intention to guide new fund managers entering private equity for the first time, as many of the recommendations elucidated in the paper provide a useful set of criteria to apply to established GPs.

As Thornton explains though, “the examples will be more beneficial for younger funds yet to go through a complete cycle of fund management.”

Whether it was the deliberate intention of EVCA to provide investors with a roadmap when assessing any GP is debatable, but it's clear that the paper provides some invaluable guidelines for prospective limited partners who – often – have as little (or less) experience of private equity fund structures and their operation as the newcomer GP. Said one longstanding UK FoF investor: “although it's all too common to cast the GP as the culprit when things go awry, there is good reason to suspect that novice limited partners can be in part to blame. Anything that moves both these groups up the learning curve by providing a common agenda must be a good thing.”

EVCA itself hopes to see the wide adoption of these guidelines as part of European private equity's necessary evolution. According to Max Burger-Calderon, current EVCA chairman and executive director at Apax Partners: “European private equity and venture capital is a maturing and professionally operated industry, but we are living in an age of financial uncertainty. The adoption of the core ideals contained within this document is greatly encouraged for those wishing to operate within the governing principles of this industry.”

As a casual review of the paper's content confirms, the Association has clearly sought to address issues that have bubbled to the surface in the past year. Whether it be the disclosure of performance information by public sector investors in the US (UTIMCO and CalPERS being the most notable), the increasing significance of clawback clauses obliging GPs to return previous distributions or the heightened awareness of new anti-money laundering regulations, private equity has become a far more visible asset class to a far wider spectrum of investors. In this context EVCA's move must be applauded.

As Burger-Calderon says: “The wide adoption of these principles will reinforce investor confidence in the asset class and contribute to the higher aim of harmonising business practice in Europe.” Ambitious?, maybe. Optimistic, that too. A good step? Definitely.

Question: What general conduct issues should the manager consider with regard to investor relations?

Explanation: Relations with investors is an area where, unless it takes sufficient care, the manager can prejudice the interests of some or all investors in a fund. At the same time in a number of circumstances a manager may be subject to confidentiality obligations to investee businesses or third parties or may be subject to restrictions relating to insider dealing or market abuse.

The manager may also need to consider the need to disclose significant issues to investors outside of established reporting obligations.

Recommendation: The manager should seek transparency in its relationship with investors by ensuring that they all receive all significant information regarding the fund in a clear and timely manner, provided that communicating such information is permitted by law. The manager should not breach confidentiality obligations binding on it but should seek to be relieved of such obligations if they prevent proper reporting to investors.

The manager should follow the agreed procedures for disclosure of conflicts of interests to investors. Certain investors and types of investor will require different information, or information presented in a different way, to satisfy their own tax, regulatory or commercial obligations. Where practicable, the manager should comply with those requests.

Although it is not obliged to provide all information requested by one investor to other investors for whom it may not be relevant, the manager should ensure that there is parity of treatment of investors and that all investors are provided with key, relevant information regarding the fund promptly (and normally at the same time).

*: The consultation process concludes on 13 March 2002 at the EVCA International Investors Conference with an investor-only workshop and presentation and discussion within the plenary conference. The final document will be available online at by mid-April and will be published along with all EVCA professional standards in the Association's new handbook in June.