Accounting: Taking the PE

One of the most significant changes in the corporate landscape of recent
times has been the move away from – perhaps ultimately the demise of – the
quoted company, thanks largely to the rise of regulation and the re-invention of
venture capital as private equity. Until last summer’s credit crunch it seemed
no corporate was too big to be taken out of public ownership.

This switch from the model of many owners to one has had implications for
corporate reporting. One of the differences in style that private equity
introduced into the reporting model was a re-invigorated and refocused
management reporting process. This starts even before the company is bought by
private equity funds. Talk to accountants who perform due diligence and they
point to the different requirements of private equity versus a trade buyer. The
difference can be summed up in one word – cash. In contrast to traditional due
diligence, private equity want to know about issues of liquidity – how much cash
and when?

Those who have worked in the finance departments of companies pre- and
post-takeover by private equity also testify to the change required in the
nature and volume of the regular management information required. Private equity
requires more data in more detail cut in every way known to man. Those who
produce this information seem confident that the fruits of their labour are not
shoved into a drawer, but are used to understand the business and continue the
quest for extra profit, innovation, greater value and cash. Indeed, one
criticism a finance department raised was the slightly tedious aspect of the
private equity owner suggesting ideas to improve the business that others knew
from previous experience wouldn’t work.

The fact that large private companies could exclude themselves from external
reporting regimes didn’t used to matter. However, the rise of corporate
governance in the 1990s was not driven purely by the clamour of shareholders for
better and greater disclosure, but increasingly to satisfy the demands of other
stakeholders – employees, customers, suppliers and lately particular concerns
such as the environmental lobby. It was the way that these other stakeholders
perceived the economic significance and disadvantage of private equity which led
to suspicion and distrust of private equity. The proposals of the Walker Report
– finalised at the end of 2007 – extend the financial reporting tent to include
large private equity businesses. Large is a high hurdle: more than 50% of
revenues generated in the UK; more than 1,000 full-time equivalent UK employees;
and for take-private transactions, a market value at the time the deal was
struck in excess of £300m (for a non-market transaction the figure increases to
£500m). Tick all those three boxes and the company has to comply with the Walker
guidelines. Also under the code, the private equity is asked to “communicate
promptly and effectively with employees, particularly in times of strategic
change”. It is hard to see a meeting of minds between workers and bosses on that
phrase.

When the British Private Equity and Venture Capital Association (truncated as
BVCA) published its report, it said it would take time to put the appropriate
processes in place and promised that a group to monitor and review the
guidelines would be set up early in the new year under the guidance of ex-KPMG
and now BT chairman, Sir Mike Rake. Whether that monitoring includes checking
compliance by individual companies is unclear. In February, the BVCA was
describing the arrival of the group as imminent.

As for the disclosures themselves, they are symbolically significant rather
than onerous. As the Walker report itself says, the guidelines will not call for
numerous disclosures that are “in place and specifically appropriate” for quoted
companies such as quarterly earnings statements, nor do they include any
specification as to corporate governance of portfolio companies beyond calling
for a description in the annual report of the composition and relevant
experience of the board.

The guidelines call for a business review that conforms more or less to the
provisions of section 417 of the Companies Act 2006, including sub-section 5,
which is usually applicable only to quoted companies. The guidelines say that
the report and accounts should be published no more than six months after the
company year-end (a longer period than the four months envisaged in the July
consultation document, and in line with the provision for AIM-listed companies)
and that a summary mid-year update should be placed on the website no more than
three months after mid-year (as against the delay of only two months envisaged
at first).

The private equity industry hopes it has done enough to calm public
disapprobation. While credit crunches and recessionary fears have knocked
private equity off the top slot as the latest unacceptable face of capitalism,
it will be interesting to see whether, in the medium term, this example of
light-touch, self-regulation will satisfy the private equity critics.