The world of private equity has gone pretty quiet of late, but expect a renewed flurry shortly on the delicate topic of disclosure in the UK, predicts the FT’s Tony Jackson in his Monday column. The UK industry’s code of practice commissioned from the veteran banker Sir David Walker comes out Tuesday week, and it could be interesting, Jackson notes.
Europe’s biggest and most attention-grabbing buy-out has been KKR’s purchase of the retailer Alliance Boots. KKR is of course American – and has apparently signed up to Sir David’s proposals in advance.
Nor is the thrust of the matter confined to private equity. As Sir David found with his earlier consultation document, there are two fundamental questions involved, says Jackson: the difference between public and private companies, and the relationship between shareholders and stakeholders.
Begin with the fact that under law, a company owned by private equity is no different from any other private company. So why is it singled out for special treatment?
The answer surely lies in the taking private, during the peak of the boom, of large and prominent public companies. For the industry as a whole, this was a strategic blunder. Various interested parties, the press among them, resented the sudden absence of information, from the chief executive’s salary on down.
Recall, though, why we know such things about public companies in the first place. Their shareholders are widely distributed, and so must be kept informed in an elaborate and public manner. Private company shareholders, who can sit round a table, have the same details – often more, but they keep it to themselves.
That said, a resort to mere legality – as Sir David has pointed out – risks missing the point. The heads of large companies are, in the western world at any rate, the most powerful individuals not subject to popular vote. This raises the issue of legitimacy.
Over the past few decades, privatisation has created many more such individuals. In the case of public companies, one response has been to demand more information. Private equity, by withdrawing that information, threatens to put the process into reverse.
The people who are cross about this are not of course the shareholders but the other stakeholders.
UK company law has always required private companies to lodge accounts with Companies House, on the obvious grounds that those doing business with the company – one set of stakeholders – should be clear on its financial standing. Indeed, last year’s updated Companies Act goes further, at least in setting out directors’ duties.
Disclosure is a different matter. The annual filing must now include a narrative business statement, setting out the company’s performance and the main risks and uncertainties. But the explicit purpose is to inform members of the company – that is, the shareholders – how well directors have done their job. There is no obligation to disclose anything further to stakeholders.
In the special case of private equity, advocates of disclosure have one or two more arguments. It is claimed, for instance, that because pension funds invest in private equity, the general public – who have their savings in pension funds – are entitled to details. But since pension funds are not in the habit of identifying the private equity firms they invest with, it is hard to see what use the public would make of this.
Perhaps the private equity firms themselves should be obliged to identify their investors. So far at least, Sir David has ruled that out, other than by broad anonymous category. He has also ruled out disclosure of chief executive pay, or the profit share going to the fund’s managers, on the grounds they are not matters of legitimate interest to stakeholders.
In that sense, the code of conduct may turn out something of a damp squib. But in a small way, it opens the door to large issues. For instance, Sir David reportedly favours applying the code to big individual proprietors and even sovereign wealth funds.
Getting the more reticent entrepreneurs to comply could be tricky. The Chinese government could be trickier again. But there are legitimate questions involved here. The present eclipse of private equity has robbed them of some of their urgency, but that does not mean they will go away.