Sir David Walker was recruited by the private-equity industry to assess whether it was communicating adequately with the outside world. He knew the answer before the off – since for most partners in private equity firms the “private” bit of their moniker is a way of life.
Walker says such secrecy is no longer appropriate. No surprise there. The Treasury has made not-very-veiled threats that if private equity firms don’t do a better job of telling their employees and other interested parties (including largely ill-informed politicians) what they’re up to, they could find themselves compelled to do so.
Also, there is a semi-respectable intellectual case for greater disclosure, which is that they now control such a big and rising share of the British economy (they are responsible for an estimated 8 per cent of UK private-sector employment) that there is a public-interest case for having clearer oversight of their activities.
Walker himself – as someone who believes that private equity spurs productivity improvements and economic growth – hopes that harvesting more robust data on private equity will turn out to be good for the firms.
He is convinced that analysis based on reliable information – which he acknowledges is in short supply – would put paid to criticisms that private equity is largely a “bubble” phenomenon created by cheap credit markets and rising share prices.
He believes that private equity will be able to demonstrate that it creates wealth to a large extent through superior operational management of companies.
That said, he does acknowledge that the capital structure of private-equity owned businesses is probably superior to that of many public companies.
Or, to put it another way, he is bemused that listed businesses haven’t followed the lead of private-equity-owned ones by borrowing more and borrowing in a more sophisticated way.
For me, therefore, the most welcome of his recommendations are those that should allow the current heated and emotional debate about private equity to be replaced by one that actually has access to proper facts.
So, for example, Walker wants private-equity firms to disclose by category the source of their equity funding – which will show that any superior returns they make are distributed largely to overseas investors, rather than to British pension funds.
He also urges that private-equity firms publish a breakdown of their returns to show what proportion of their profits comes simply from riding on the back of rising stock markets, what share comes from financial engineering and what part comes from genuine productivity and trading improvements in the businesses they own.
Another proposal is that the private-equity partnerships should publish an annual account of their respective investment philosophies and how they oversee and direct companies in their portfolios.
Finally he wants private-equity owned businesses to behave a little more like public companies by publishing proper annual reports of their financial and operational progress within four months of the year-end and shorter six-monthly statements.
Critics of the industry will say this is all motherhood and apple pie – and that Walker is merely deflecting from more important debates about how little tax private equity pays and its impact on employment.
Except that these debates are less informed than they might be, in the absence of the kind of information which Walker’s proposals should yield.
So one reasonable concern is that some private-equity firms will ignore whatever code-of-practice emerges from Walker’s review, because they will view it as burdensome and intrusive.
And although the media, politicians and trade unionists may name and shame them, these firms won’t give a stuff, so long as they continue to receive oodles of cash from their overseas backers.