Two sides to every story

Private equity is still trying to justify its self-regulated existence, writes Toby Mitchenall

In the latest chapter of an ongoing saga, the Guidelines Monitoring Group (GMG) recently published its first report on how the UK private equity industry had fared in its first twelve months of self-regulation.

The GMG reported that just half of the 32 firms that had agreed to adhere to the 2007 Walker Report guidelines – which require firms to publish portfolio company performance details – had managed to comply fully.

The report was greeted with cheers from the private equity industry but jeers from its detractors.

Toby Mitchenall

The British Private Equity and Venture Capital Association (BVCA) welcomed 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.

This is an understandable view to take; even when regulatory codes are mandatory rather than voluntary, compliance will be delayed, incomplete or often misunderstood the first time round. The Sarbanes-Oxley Act in the US and the Markets in Financial Instruments Directive in Europe are two poignant illustrations of this.

However, private equity’s detractors also took gratification from the GMG’s report, which to them proved what they already expected: self-regulation is a toothless, useless beast.

The 2007 Walker Report also recommended the production of an in-depth report on the performance of portfolio companies, in order to show the world how private equity firms earn their returns: leverage and asset stripping or genuine operational improvement.

The resulting report was released on Wednesday and, as with the GMG findings, both sides of the debate took solace. It showed that private equity produced a better return on investment than the wider stock market (was that ever in question?) and that it actually created jobs, albeit at an average rate of 1 percent per annum: not vast considering the boom years of 2003 to 2007 covered by the study. It also showed that debt provided the lion’s share of returns.

The week’s developments, therefore, did little to sway opinion on either side of the debate. The only surety is that the scrutiny of private equity is only going to intensify as trading conditions get worse and portfolio companies come under increasing financial pressure.

And while private equity critics within the European Parliament continue to press the European Commission to regulate private equity – an open letter this week from three ministers to the president of the EU decried the use of self-regulation – the UK private equity industry needs to show that self-regulation can actually work.