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23 Jul, 2007

Private Equity Funds Guidelines Claim to Promote “Transparency”

Seeking to counter a growing image problem and reputation as predatory buyout “asset-strippers”, private equity companies are trying to work out voluntary guidelines to provide more “disclosure and transparency” about themselves and their mega-billion dollar deals.

Declaring that “private equity needs to become more open,” a preliminary review of public disclosure requirements has been conducted “on request” from the British Venture Capital Association and posted on the website of the consultant www.walkerworkinggroup.com to invite public comment.

Designed to deflect more public criticism, media controversy and government regulation, the review has set 9 October as the deadline for responses. The preliminary review has so far been an internal affair; most of the people on the consultant’s “advisory committee” and those from whom comments have been sought thus far are within the private equity sector itself.

The recent US$ 26 billion buyout of the Hilton Corporation by the Blackstone Group is one indication of how private equity companies are growing their stake in hotels, airlines and tour operators. Blackstone also owns Travelport, Centerparcs, Extended Stay America and numerous other theme parks and hotel franchising companies worth billions of dollars.

While private equity companies claim these buyouts are designed to enhance the acquired company’s performance and grow its business, global trades unions accuse them of being “asset-strippers” who will “strip and flip” the companies.

The review in the UK seeks to “promote materially greater visibility of private equity, but without eroding its capacity to act as a positive agent of economic change and as a contributor to the UK economy through the concentration of significant cross-border private equity activity in London.”

It says that the importance of private equity has been “inadequately explained, and its role and the ingredients in its success are not well understood.

“This is partly the result of the understandable tendency of many in the industry, who chose not to be in the public eye of the listed sector, to say that ‘private means private’ and to be attentive to confidentiality to the point of secretiveness. It is also the result of very rapid recent growth in a highly competitive industry, which has left many of the main industry participants focussing on winning deals and implementing business strategies in the companies they acquire with little attention to the wider context.”

As a result, it says, it is important to find ways “to reduce the palpable visibility gap and the wider public suspicion of private equity that has come to be associated with it. Private equity enjoys rights of ownership which, in particular given their massive scale, must now be complemented by matching obligations.”

The review suggests several transparency and disclosure actions that can be taken by three separate but related groups: private equity portfolio companies, the general partners who manage private equity funds and the representative industry association.

These range from filing of the annual report and financial statements on a company website within 4 months of the year-end to listing a detailed composition of the board, indicating separately executives of the company, board members who are executives of the general partner or fund and directors brought in from outside to add relevant industry or other experience.

The “financial reporting should cover balance sheet management, including links to the financial statements to describe the level, structure and conditionality of debt,” the review says.

One key recommendation is for the buyout firms to “provide a broad indication of the performance record of their funds, with an attribution analysis to indicate how much of the value enhancement achieved on realisation and in the unrealised portfolio flows from financial structuring, from growth in the earnings multiple in the market in the industry sector, and from their strategic and operational management of the business.”

Because the buyouts also attract huge media interest, the review notes that “private equity firms will be expected to be more accessible to specific enquiries from the media and more widely.

It adds, “Confidentiality concerns will constrain responses that can be given in some situations, but the line between openness and secretiveness should be drawn with much greater flexibility than hitherto, especially in respect of large transactions which, in the listed sector, would attract very full public presentation.”

Considerable responsibility is also placed on the private equity industry association which is called upon to collect and disseminate date on an authoritative industry-wide basis, covering areas such as scale of funds raised, categorisation of limited partners by type and geography, and scale of existing private equity portfolios and of recent buyout activity.

The association is also asked to provide “estimates of levels and changes in employment and new capital investment by portfolio companies,” estimates of aggregate fee payments by private equity management companies and by portfolio companies to other financial institutions and for legal, accounting, audit and other advisory services, and more.

The review notes that all this is the best interests of the equity industry itself. It quotes this piece of advice given to the UK Treasury Select Committee, “Private equity is more likely to prosper if the industry has a positive image which will encourage others to invest and deal with it and will not cause alarm to employees, trade unions, suppliers, customers, regulators or legislators”.

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