How transparent is private equity?

January this year opened the latest chapter of the UK private equity industry's move towards increased transparency as outlined in 2007's Walker Report, with the publication of the Guidelines Monitoring Group's (GMG) first annual report.

The GMG report evaluated industry take-up of the Walker guidelines: the recommended best practice for disclosure of firms' annual reviews, investment approach, investment valuation methods, limited partner reporting and portfolio company information.

The group, chaired by Sir Michael Rake, chairman of telecom giant BT, reported that half of the 32 firms which had agreed to adhere to the guidelines had managed to comply fully. “The efforts made by the private equity industry so far are encouraging, but improvement in some areas is both possible and necessary,” said the GMG.

The British Private Equity and Venture Capital Association (BVCA) hailed the report as evidence that the industry had willingly embarked on the road to transparency. It is “a process not an event”, said a statement from BVCA chief executive Simon Walker. Wherever there were reporting gaps, “corrective moves have been pledged or implemented already,” he continued.

At the same time, union responses to the results were at best lukewarm. “A year on from the Walker review, private equity firms are disclosing more information than was once the case, but there are still important gaps, for example over conflicts of interests in private equity funds and on information over holding periods. The Walker guidelines need revising to ensure that more private equity portfolio firms fall within their remit,” Brendan Barber, general secretary of the Trades Union Congress, told UK newspaper The Guardian.

As well as voluntary reporting guidelines, the 2007 Walker Report also recommended the carrying out of an in-depth report on the performance of portfolio companies, in order to clarify exactly how private equity firms earn their returns.

The resulting report, as with the GMG findings, provided ammunition to both private equity's champions and detractors. Based on an analysis of 42 current and exited portfolio companies, it showed that private equity produced a better return on investment than the wider stock market – something arguably not in question – and that it created jobs, albeit at an average rate of just 1 percent per annum during the boom years of 2003 to 2007.

It also, however, showed that debt contributed more than half of the returns generated, while operational improvement counted for less than a fifth.