Revisions to the Walker Guidelines
In response to calls for greater transparency within the private equity industry, Sir David Walker headed the creation of what has become known as the Walker Guidelines (the Guidelines). Published in November 2007, the Guidelines request, inter alia, that Financial Conduct Authority (FCA) authorised private equity firms make enhanced disclosures on a 'comply or explain' basis.
It is hoped that the Guidelines will help promote a more open and positive public image of the industry and, in particular, raise the bar of the standard of reporting to prevent the need for further regulation or legislation.
Following a recent industry consultation by the Guidelines Monitoring Group (the GMG), certain updates have been made to Part V of the Guidelines as highlighted below.
Scope of the Guidelines
The Guidelines apply to FCA authorised private equity firms which either:
- (a) hold a majority stake in, (b) are able to direct financial and operational policies of, or (c) report in their financial statements that they control a "UK Portfolio Company"; or
- have the designated ability to engage in such investment activity.
A "UK Portfolio Company" is defined by the Guidelines as a company with a market capitalisation or enterprise value of £350m or more, and which either has more than 1,000 employees or generates more than half of its revenue in the UK. The Guidelines therefore only apply to a limited number of larger firms.
However, those private equity firms to which the Guidelines apply must, inter alia:
- publish more information on the firm's website including the:
- history and investment approach of the firm;
- leaders of the UK arm of the firm and senior members of management; and
- categorisation of its funds' investors by type and geographic location;
- provide significant data to the British Private Equity & Venture Capital Association for industry analysis; and
- report to the portfolio companies' employees, for example, at times of strategic change.
Revisions to the Guidelines
The amendments to the Guidelines require portfolio companies, with financial years ending after 30 September 2014, to make enhanced disclosures in line with section 414C of the Companies Act 2006. As a result, those companies must produce an annual strategic report including:
- information on the company's strategy, business model, objectives and principal risks;
- the company's main key performance indicators;
- details of the gender diversity at board, senior management and employee level;
- information on the company's human rights policies; and
- specific statements of conformity with the Guidelines, or explanations for non-compliance.
The GMG has, however, been cautious with the extent of its revisions. Information regarding greenhouse gas emissions need not be disclosed and the GMG has also expressed that the Guidelines will not be extended to reflect the broad application of the EU's Directive on Alternative Investment Fund Managers 2011 which imposes similar obligations as the Guidelines but to a greater array of private equity firms.
The GMG further issued an updated version of their guidelines on good practice reporting in line with the revised Guidelines, and commissioned PwC to examine a sample of portfolio companies' annual reports and issue a report on the level of compliance with the Guidelines in December 2015.