UK buy-out industry defends code

The private equity industry was forced on the defensive on Tuesday as its new voluntary code of conduct was criticised for being too soft.

John McFall, chairman of the Treasury select committee, echoed criticism from trades unions when he called the new code on transparency and disclosure “inadequate” and said it should be tightened up.

The code was launched in response to government pressure for the industry to act or face legislation following a wave of public criticism over job cuts at companies bought by private equity, such as the AA and Birds Eye.

After its official unveiling on Tueday by its author, Sir David Walker, the City banker and former regulator, buy-out bosses lined up to defend the code and stress how much of a sacrifice they were making.

US buy-out firms are particularly upset that they will be forced to adopt plc-style disclosure rules that will not apply to other private investors, such as Sir Richard Branson’s Virgin Group or Asian and Middle East sovereign wealth funds.

The challenge of facing “an unlevel playing field with other privately owned firms and sovereign wealth funds, with whom we compete every day”, should not be underestimated, said Robert Easton, managing director of Carlyle.

The threat to expel buy-out firms from the British Private Equity and Venture Capital Association (BVCA), the industry’s trade body, was “the same as naming and shaming”.

While some of the more draconian measures were dropped from Sir David’s consultation document in July, the Carlyle executive told the Financial Times: “The code has not been watered down. In fact it has been strengthened.”

Mr McFall, whose parliamentary committee has led the political charge against the buy-out industry, told BBC Radio 4’s Today: “If the aim is to keep the barbarians from the gate, they have failed.” The committee said on Tuesday it would question Sir David again on December 11, as it resumes its inquiry into tax and disclosure in private equity.

Brendan Barber, Trades Union Congress general secretary, said the code had “fallen short” on the main areas of public concern, such as fees charged by buy-out firms, the identity of their investors and the tax they paid on earnings. “There is a danger that Walker’s voluntary recommendations will prove toothless,” he said.

But Sir David defended his code, telling the FT many buy-out firms “absolutely hated” the idea of the new independent monitoring group, chaired by Sir Michael Rake, which will have the power to expel firms from the BVCA. The abandoned plan to ask firms to disclose how much of their returns they generated from financial engineering, multiple expansion and operating earnings could still happen, once a “monitorable standard” was created.

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What it means for private equity

Who is affected?
● Private equity firms authorised by the FSA that own or could own a UK company
● Listed companies bought by private equity for more than £300m ($620m)
● Unlisted companies acquired for more than £500m, which employ more than 1,000 staff in the UK and generate more than half their revenues in Britain

Requirements for privately owned companies
● Publish an annual report detailing: identity of private equity owner and senior managers; board composition; prospects; information on employees and environmental, social and community issues; a review of debt and risk management
● Publish an interim update on significant developments
● Provide data to the BVCA trade body

Requirements for private equity firms
● Publish its structure, leadership, and approach to UK companies it owns
● Commitment to comply with the Walker code
● Categorise its investors by type and geography
● Provide data to the BVCA
● Communicate in a timely and effective way with employees at acquired companies and ensure as smooth a transition as possible at companies that are taken over by creditors

Requirements for the BVCA
● Establish independent code monitoring group
● Publish analysis of private equity industry
● Seek commitment to the code from “private equity-like” groups, such as sovereign wealth funds or big private investors