PEO 2.0: WARY OF WALKER

One of the most read stories of the last month on PEO showed what can happen when a man is freed of his corporate shackles.

London-based European private equity firm PPM Capital spun out from financial services company Prudential after 600 days of negotiations, according to its managing director Neil MacDougall. Fifteen members of the PPM Capital team have acquired 100 percent of the company, he said.

Simultaneous with the announcement, MacDougall found his voice. He was, he said, relieved his team will no longer need to comply with the Sarbanes Oxley regulations it had to meet as part of a company with a presence in the US. MacDougall noted: “There are tangible benefits of spinning out. Because of Sarbanes Oxley we have been unable to use [accountant] KPMG on any transactions because it once worked as a group auditor for the Prudential.” He was also pleased to leave behind the reporting requirements the US legislation demands of portfolio companies.

Given his experience of US regulations, MacDougall was relieved that the Walker Report into transparency and disclosure in private equity will not affect the portfolio reporting requirements of the mid-market companies his team oversees. Walker's report suggested disclosure requirements for large portfolio companies – defined as companies formerly in the FTSE 250, an index of the UK's biggest listed companies; companies with more than 1,000 employees and a value of more than £500 million (€699 million; $1.2 billion); or companies where the deal price involves an equity consideration of more than £300 million.

However, MacDougall rejected the motivation behind the Walker Report. “I object to the need for private equity to in some way justify its existence. Provided you comply with the rules of the land and act in a legal way you should not have to explain yourself,” he said. With half of PPM Capital's investments in the European Union but outside the UK, MacDougall objected to the Anglo-centric nature of the reforms.

“Will [PPM's French competitor AXA Private Equity] have to comply with this and if not why not?” he asked. “We are dealing with one particular aspect of our business and why should we get ourselves tied up in knots with extensive reporting if our competitors do not have to do the same?” MacDougall supported European trade body the EVCA's demand that the Walker Report should apply on a Europe-wide basis.

As outlined on p.26 of this issue, Walker has recommended that “private equity-like” investors such as sovereign wealth funds operating in the UK should be given a special category of BVCA membership and be subject to the same scrutiny as their rivals.

But to gauge the reaction from one respondent to a report in the New York Times Deal Book, Walker is too little, too late because the “cattle are already out of the corral”. The respondent, who gave his name as “Hank”, uncharitably deemed the BVCA and Walker's team “a bunch of procedure-burdened fools”.

Simon Walker, the BVCA's latest chief executive, is adamant the increase in self-regulation for UK private equity will not damage London's primacy in European buyouts, whatever MacDougall thinks. He told the FT that “there are many powerful reasons for being based in London, not least the infrastructure of legal and advisory support services. I don't think it will tip people over the edge, although these things are cumulative.”

Regulatory and tax changes targeting private equity are under review in other countries, such as the US and Germany, so the UK might yet emerge as the most favourable regime, he said.

Walker added: “Nowhere in the world has the industry attempted anything comparable. Sir David's plan is being greeted with some trepidation within the industry” even though most “recognise this is a necessary directional shift”.

“It would be madness to devise a system that serves merely to drive private equity offshore into jurisdictions with lower standards of transparency and regulation than our own,” Walker concluded.