Investors in the dark over impacts of private equity

The private equity industry has shed little light on its progress on complying with the voluntary Walker guidelines on company reporting, including information on environmental impacts.

In 2007, the British Private Equity and Venture Capital Association (BVCA) asked banker and regulator Sir David Walker to review the adequacy of disclosure and transparency by private equity firms and the companies they own, so-called portfolio companies.

The review recommended that all UK portfolio companies with at least 1,000 staff and bought by private equity firms in public-to-private deals of over £300 million should publish an annual business review similar to that required of publicly quoted firms by the Companies Act 2006. This would include an assessment of firms’ environmental impacts.

The guidelines require private equity firms themselves to describe their structure, investment approach and the companies they own. But, in contrast to portfolio companies, they do not have to report their environmental and social impacts.

Thirty-two private equity firms and 54 portfolio companies that either meet the Walker review criteria or volunteered to participate were supposed to publish a report by the end of 2008.

In January, the Guidelines Monitoring Group (GMG), which oversees the guidelines’ implementation, published its first progress report.¹ Overall, the report says there has been strong support for the guidelines with many portfolio companies having made "good or acceptable disclosures with only a limited number of exceptions". But "the nature of the disclosure varied significantly".

"This was the first year in a process where best practice will evolve over time. The efforts made by the private equity industry so far are therefore encouraging, but improvement in some areas is both possible and necessary," the report says.

The GMG commissioned consultants PricewaterhouseCoopers to review a sample of 30 reports by portfolio companies. Of these, two did not meet the requirement to report on the business’s environmental impacts and the policies in place to address them. Seven omitted data on their social impacts. The report says the GMG has written to these companies and received a commitment to address the failures.

But the report provides no detail on the quality of the information disclosed by portfolio companies aside from saying it "varied significantly" and that some reports could "benefit from a greater degree of detail and quantification".

This leaves investors in the dark over whether companies are trying to minimise financial and reputational risks to their businesses from environmental and social issues. Moreover, the report does not name the companies whose disclosures were inadequate.

John Davies, head of business law at the Association of Chartered Certified Accountants, said while the findings were broadly positive the report "doesn’t shed a great deal of additional light on quality of disclosures". He continued: "The report is very generalised and doesn’t specify areas of strength and weakness."

A BVCA spokesman said: "This should be seen as a process and something which will evolve over time. The industry has got work to do - they recognise that - but, as the first report from the GMG, it’s a ‘good but could do better’." He added that "to name and shame would be counter-productive".

Sir Michael Rake, GMG chairman and chairman of BT, said: "I am encouraged by the extent of the commitment which the private equity industry has shown to the increased levels of transparency and disclosure that have been requested by the Walker guidelines."

The report suggests the quality of reporting is variable because portfolio companies have done it a year before publicly listed firms are required to do so under the Companies Act. Therefore they have no examples of best practice to work from.

But this explanation is weakened by the many award-winning environmental and social reports published voluntarily by companies and guidance such as that of the Global Reporting Initiative.

On disclosures by private equity firms themselves, the report says only half met all the Walker guidelines. The GMG contacted firms that omitted information and they agreed to correct their report. Again, it did not name those failing to meet the guidelines.

A flaw in the Walker guidelines is that private equity firms are not required to disclose their investments’ environmental and social impacts. An example might be the acquisition of companies in unsustainable businesses such as fossil fuel power generation and offshore oil and gas exploration (ENDS Report 404, pp 34-37 ).

A BVCA spokesman said the GMG would meet in the spring to review the guidelines and this might be one issue considered.