A leading City figure and former Bank of England director criticised the private equity industry yesterday for its secretive behaviour but stopped short of saying that buyout bosses should disclose any details of their pay or taxes.

In a 42-page report, Sir David Walker said that private equity firms were confidential “to the point of secretiveness” and called on international buyout houses to be more accessible to their employees, investors and the public. They should be made to provide annual reports, while the companies that they own should report twice yearly, he said.

The report, which was commissioned by the private equity industry’s own trade group, is the first attempt by the buyout firms to stem a rising tide of political and union pressure over the way in which they do business.

The firms, which acquire companies by using vast sums of debt, have been accused of buying companies on the cheap, paying little or no tax and then making off with millions in profit when they sell the businesses a couple of years later.

The report will trigger a three-month consultation period, after which Sir David will publish a code of conduct. He emphasised that the code would be voluntary and urged against regulation that he said would be burdensome for the buyout firms. However, he recommended that the new code be reviewed regularly and updated, as necessary, over time.

Trade unions, which have led the charge against the industry, quickly rounded on the report as not being rigorous enough.

Brendan Barber, the General Secretary of the TUC, said: “This is simply a proposal for a voluntary code of conduct, while disclosure requirements on public companies are mandatory and enforced by the courts. A ‘comply or explain’ code is not sufficient. There needs to be full disclosure by all players.

“Most importantly, it will do little to reassure the staff of private equity takeover targets that the quest for short-term returns will not continue to threaten their jobs, pensions and working conditions.”

Sir David, a former chairman of Morgan Stanley International and the Securities and Investments Board, proposed that private equity firms should publish an annual review, which would be accessible on their websites.

The review would include information on the top partners, their approach to the employees of the companies that they own, the performance of their funds and an indication of who their investors are.

Aside from the annual commitment, the buyout bosses would also need to make themselves available to specific inquiries, from the media and, more widely, on an ad hoc basis. “The line between openness and secretiveness should be drawn with much greater flexibility than hitherto,” Sir David said.

Portfolio companies owned by private equity would also be required to report on an annual basis, as well as providing interim updates.

His report stopped short of calling on the billionaire chiefs of firms such as CVC, Permira and Cinven from disclosing their personal earnings or providing details of their tax arrangements.

Transparency on that level was seen as key because the main criticisms of private equity in recent months have centred on the use of tax loopholes that enable the partners to pay as little as 10 per cent tax or less on the profits that they earn from their investments. That is because the profits, which form the bulk of any partner’s remuneration, are treated as capital gains for tax purposes and are subject to taper relief.

The tax issue is also the subject of two continuing government reviews into the industry, as well as taking centre stage at the Commons Treasury Select Committee private equity hearings last month.

Sir David defended his position, saying that tax was not part of his remit and that disclosure on pay was “not a matter for the private equity fund”. Instead, he urged the funds’ investors, which are mostly British and international pension funds, to push for greater transparency where required.

“Those to whom you should direct your concerns are the limited partners,” Sir David told The Times, referring to the name given to private equity’s pension investors.

The British Private Equity and Venture Capital Association (BVCA), which commissioned the report, welcomed its initial findings but called for a level playing field between private equity and other private companies, such as those run by Sir Richard Branson and Sir Philip Green.

Wol Kolade, the chairman of the BVCA, said: “Sir David has produced a clear and powerful document, which poses some real challenges for the larger buyout houses, in particular. Our members will need to study this carefully and we urge them to make their views known. We agree that there needs to be more transparency, but there must also be a level playing field between private equity and other private companies.”

Sir David said that the code could, over time, be adopted as a standard for all private companies.

–– This is an important step in the evolution of the private equity sector Private equity ownership is making a very dynamic contribution to the UK economy and it is important that this should be communicated
Richard Lambert, CBI Director-General

–– The consultation by Sir David Walker should not mean private equity prepares vats of whitewash to cover up the way workers in the UK are treated in these leveraged buyouts
Jack Dromey, deputy general secretary of Unite, Britain’s biggest union

–– This is a deeply considered and thought-provoking document. We will respond to Sir David when we have reviewed it in detail but we have long said we subscribe to the need for fuller disclosure and will be working to that effect
Ian Sellars, a partner at Permira

–– Sir David is obviously a well-intentioned person who has been forced to conclude that there is a yawning transparency and accountability gap to be filled
Paul Kenny, general secretary of GMB

A guide to self-regulation

Private equity firms should provide:
–– identification of the management company’s leadership team
–– a commitment to conform to proposed guidelines on a “comply or explain” basis
–– an explanation of their approach to employees, the handling of any conflicts of interest and their approach to corporate social responsibility
–– a broad indication of the peformance record of their funds
–– specific categorisation of the limited partners in their funds, including banks and private individuals

Portfolio companies should provide:
–– annual reports on their websites within four months of the year-end, as opposed to the current nine for all other private companies
–– a short interim statement no more than two months after the mid-year
–– details on the composition of the board
–– narratives by the chairman or chief executive on the company’s values and approach to its employees and its role in the wider community
–– details of the balance sheet including the level, structure and conditionality of debt

Data collection including:
–– performance of funds and the scale of funds raised
–– details of limited partners by type and geography
–– leverage levels and debt structures, indicating significance of covenants
–– levels and changes in employment and new capital investment by portfolio companies

*Alexis Ashman

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