I’m David Walker, former chairman of Morgan Stanley International, I was the former regulator, the precursor of the FSA in the City and a number of other roles. I was asked by the Venture Capital Association which is the industry association for private equity in the UK, and by a group of major buy-out firms, to undertake an independent review into the degree of openness of private equity, which had come in for a lot of criticism, in particular in the last part of last year, the first part of this year. I think it was mainly because the scrutiny of private equity at the big buy-out end had intensified greatly when they were pitching to buy Sainsbury’s, which in the event was a transaction that did not happen, and also to buy Alliance Boots, but there was seen to be a lot of movement in their acquisition of listed companies that were being taken private, and an acute sense that private equity is very secretive and the great British public just didn’t know enough about what was going on. And I think that sort of sense of uncertainty and ignorance led to a lot of suspicion. I have to say I think a lot of that was wholly justified, so there was disquiet that had to be addressed one way or another.

I started this task as an independent and I suppose two or three major things have happened since then to which I want to draw attention. One is that when I started in March private equity at the big buy-out end was being fuelled in particular by cheap and abundant credit and because of what’s happened in the intervening period that’s no longer the case and private equity has very substantially slowed down at the big buy-out end. That does not mean that the issues that I was asked to address are all behind. My view is that there are powerful secular forces driving private equity which will continue to drive it even though for the time being the cyclical element of cheap credit is no longer present. One of the powerful forces driving private equity is a sense that many in business have that to be in the quoted sector where Boots was before it became private, to take a specific example, involves many more burdens and obligations and accountabilities and disclosures which have the effect cumulatively of making it more difficult to conduct the business in a tight, sharply aligned way, bringing together owner and management interest in the way that private equity can. That I think as an issue leads to what I have called a sort of regulatory arbitrage and that will continue even though the credit source, of drive, of dynamism, has gone for the time being. Private equity at the big end is set to become more significant in the UK even than it is now.

The second thing that’s emerged which is a big change from when I started is, partly because of the perception of a weaker and weakening dollar, is the interest of sovereign wealth funds in particular in doing private equity-like business in the UK. This is probably the most open, developed economy in the world, and sovereign wealth funds, who, for whatever combination of reasons, are seeking to diversify in the asset classes in which they’re invested, in particular out of the dollar, see private equity-like business in some cases as very attractive. And so I’ve had to consider how – whether – it’s appropriate to extend what I’m proposing in relation to private equity, which does not include in a formal sense the sovereign wealth funds, to people who are doing that sort of business.

What’s being put in place in these voluntary guidelines in the UK is unique. No other country has this approach, no other country has legislation around private equity – and I’m not proposing legislation which I think would be inappropriate, I’m proposing voluntary guidelines – this is a first step. No other country in the world is doing it. It’s appropriate that we should be doing it in the UK for a couple of reasons.

One, the penetration of private equity in the UK is greater than in any other developed country. It employs between 8 per cent and 10 per cent of private sector workers. It’s not satisfactory that we don’t have absolutely rock solid, hard and dependable figures, and one of my recommendations is that we should improve the quality of data around the whole of private equity.

The second reason why I think it’s peculiarly appropriate that we should be doing this in the UK is that London is not only the world’s second most important centre for private equity but also this light touch voluntary guidelines approach is very much a British approach to this sort of issue. We’ve applied it in other areas, the best example in the city of London is the takeover code which by general acceptance around the world has worked extraordinarily well. We had London rules for the behaviour of banks, in previous crises when there were credit problems in particular companies, and I think the light touch voluntary approach relying on the enlightenment of the self-interest of people in business is powerfully effective.

But it’s not a surprise to me that many who are a perfectly legitimate and proper part of public interest in the UK should be sceptical and doubtful whether this goes far enough. One strand of criticism is that voluntary guidelines cannot be sufficient to deal with something which is so important for employees, for the public interest in who owns big blocks like iconic names on the high street in the British economy and that really primary legislation is the only way to tackle this. I take a different view. The thing that’s important to keep in mind is you can move from voluntary guidelines to primary legislation, it’s very hard to move the other way round.

My expectation is the guidelines will be widely conformed to. I put in place to ensure that that happens, to reinforce the self-interest of those in private equity firms and portfolio companies in conformity, a monitoring process chaired by a very strong, independent-minded individual Sir Mike Rake. There will be two more independents appointed to that group, that will come from the industry association shortly and a couple of industry practitioners, and I believe that group will come to be an important part of the crucible, the centre, for ensuring that although its approach will be light touch there is actually on a comply or explain basis conformity with these guidelines.

It’s been suggested in some of the comment immediately after the guidelines were published that they’ve been watered down in deference to pressure from major private equity firms. That’s not the case. What is the case is that I’ve had very substantial dialogue with the major private equity firms who are going to be affected by these guidelines, as also with unions, politicians, with the Treasury Select Committee, with the CBI, the TUC and so on, and I’ve listened to them all, but this report and the guidelines that are emerging from it are my responsibility, not that of the working group where I had to secure a majority view or consensus. So the answer to the proposition that the guidelines have been watered down in deference to the general partners of private equity firms is just not the case.

There’s one area that I’ve attached very great importance to, that I illustrate as an area where I’ve changed my position, not in deference to the private equity firms but to produce a better outcome. One of the things that is very important is to promote wider understanding of the way private equity operates, and the nucleus, the core, the heart of that is how is it that a private equity firm generates value. Not value for the partners, for the individuals, for the funds – of course that matters – no, value for the British economy. How do they improve the performance of the companies in which they invest? And there are two or three ways in which this can happen. They can engage in financial engineering. Many people dislike that because they say this imposes undue leverage on these companies and therefore increases their vulnerability.

The second ingredient is that the space a portfolio company is in is rising in the whole market. For example energy, at the moment, virtually all energy is in a rising market environment. Commodities ditto. So, you can’t say that private equity has done that, that’s the rising water level in the lock, that lifts all the boats in the lock. So that’s another category. You have to take that out, take the leverage out.

The third category is what has been secured by way of real improvement in productivity, operating and performance, expansion of the top line of the business in terms of the revenues and the margin that it can generate by the private equity firm and that’s called, let’s call it operating performance.

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