Memorandum from the British Private Equity
and Venture Capitalist Association (BVCA)
EXECUTIVE SUMMARY
1. Transparency and Sir David Walker's proposals
for improving the transparency of the private equity industry
The BVCA has accepted the Guidelines for Disclosure
and Transparency recently issued by Sir David Walker. The guidelines
make recommendations and set out increased levels of reporting
for private equity firms, their portfolio companies and the BVCA
as the industry body.
The guidelines apply exclusively to private
equity firms which are managing or advising funds that own or
control "large" UK companies, or that have a designated
ability to invest in such companies.
The guidelines will be overseen by the recently
established Guideline Monitoring and Review Group (GMRG). This
group, to be chaired by Sir Mike Rake, will be composed of two
additional independent members and two GPs or advisers to funds
that invest in portfolio companies covered by the guidelines,
thus ensuring a majority of independents in the group.
The GMRG will oversee the code as well as keeping
the guidelines under review.
The BVCA believes the levels of disclosure recommended
are both appropriate for the various stakeholders, including employees,
investors and the general public. This increased disclosure will
mean that the ownership and management decisions of the portfolio
companies as well as the private equity firms will be more transparent.
The collection of more authoritative data will also make clearer
to all stakeholder groups, the industry's economic impact. With
this in mind, the BVCA has appointed Ernst & Young to collect
and analyse more detailed data on large deals.
2. TAXATION
Tax treatment of debt and equity
The distinction between debt and equity has
been established for many years and is accepted in almost all
major jurisdictions. The UK has a vitally important and highly
successful financial services sector, and any general change to
the taxation of equity and debt would need to be considered very
seriously so as not to do damage this.
The Memorandum of Understanding (MOUs) between
the BVCA and HMRC
The MOUs provide practical answers in relation
to the administration of VC and PE transactions on the basis of
the 2003 legislation. We note the Government response to the Committee's
interim report that "HMRC has no reason to suppose that the
original rationale (of the MOU) is not being followed in the great
majority of instances".[17]
Options for further reform of shareholder debt
The BVCA believes that legislation currently
in place which oversees the level of debt in any transaction is
both conceptually right and appropriate.
Further options for the reform of Employment Related
Securities ("ERS")
The 2003 legislation includes a number of anti
avoidance rules providing further protection. However, the rules
are over complex, and we suggest any reform focus on this area.
The appropriateness of the tax regime for private
equity in the light of recent changes to capital gains tax
Whilst in favour of a simplified and certain
CGT regime, the BVCA is concerned at the increase in capital gains
tax to 18% and the abolition of taper relief as it impacts all
member firms. The 18% rate is higher that most European countries,
and the new capital gains tax rate therefore damages the UK's
competitive position.
3. OTHER ISSUES
Why investors make different demands of public
companies compared with private equity-owned companies
Investors in private equity funds are usually
professional sophisticated institutions, who agree the levels
of information flow with general partners. The limited partners'
stake in the fund is an illiquid asset, and so the level of information
flow to investors in private equity owned companies can be much
greater than in public companies.
The implications of private equity-funded takeovers
for company pension funds
There is no legal difference between a takeover
by a private equity firm, and one involving funds from the public
markets. There are therefore no "implications" for company
pension funds which are different from non private equity-funded
takeovers. New regulations were introduced in 2006 which impose
strict consultation requirements on all employers when proposing
changes to future pension accrual.[18]
The operation of TUPE in private equity takeovers
TUPE was put in place to ensure that when a
company sells a business to another company in an "asset
sale", the employees who work in that business have their
jobs and terms and conditions protected. TUPE applies to all "asset
sales", so it applies to all companies, including ones that
are private equity-backed.
In "share sales" there is no need
for TUPE as current legislation protects workers employment rights,
and gives them access to information and rights to consultation,
and those protections apply after a share sale just as they do
at any other time.
Market abuse and conflicts of interest in private
equity transactions
All BVCA-member private equity fund managers
in the UK are authorised and regulated by the FSA. In common with
other investment managers, they are subject to transaction reporting
obligations laid down by the FSA. The BVCA believes that member
firms are aware of the controls over confidential and price-sensitive
information advocated by the FSA.
Conflicts of interest
The BVCA and individual member firms have been
working closely with the FSA in developing a common understanding
of the nature and risks of conflicts of interest in the context
of private equity.
A. INTRODUCTION
1. The BVCA welcomes the opportunity to
submit further evidence as part of the Committee's resumed inquiry
into private equity. As the representative body for the private
equity and venture capital industry, we represent over 400 firms,
from small starts-ups to large buyouts, and this memorandum follows
our initial submission in April.
B. TRANSPARENCY
Transparency and Sir David Walker's proposals
for improving the transparency of the private equity industry
The structure and effectiveness of the recently
established BVCA panel for monitoring, and encouraging compliance
with, the code of conduct
2.1 On 20 November Sir David Walker issued
his Guidelines for Disclosure and Transparency in Private Equity.
Along with the recommendations for portfolio, GP (General Partner)
and industry level reporting, the guidelines also recommend the
establishment of a guidelines review and monitoring capability.
2.2 Whilst highlighting that the self-regulatory
code has been adopted voluntarily by the industry, the BVCA has
accepted Sir David Walker's recommendation that a Guidelines Monitoring
and Review Group (GRMG) be established.
Structure
3.1 The BVCA has appointed Sir Mike Rake,
Chairman of BT, as Chairman of the group. Sir Mike is a highly
respected figure, and we believe he will bring considerable independence
and authority to the role.
3.2 The rest of the group will be composed
of two independent members that are GPs or advisers to funds that
invest in portfolio companies covered by the guidelines, ensuring
a majority of independents in the group.
3.3 The members of the group are to be appointed
by the Chairman and Council of the BVCA, and announcements will
be made in due course.
3.4 The group will appoint an independent
and respected institution to undertake data processing and assessment
on the basis of initial self-assessment, as well as carrying out
appropriate spot-check sampling. It is envisaged that this appointment
will be made at the beginning of 2008.
Terms of reference
4.1 The group will run independently of
the BVCA, with its own secretariat, and will maintain contact
with the BVCA on a regular basis. It is envisaged that the group
will meet four times a year and publish a brief annual report.
4.2 The group is to review the extent of
conformity with the guidelines, through compliance or explanation.
It is also tasked with keeping the guidelines under review in
light of changing industry conditions, effectiveness of the comply
or explain code, etc.
Conformity with the guidelines
5.1 The code is voluntary in the sense that
the industry has signed up to it of its own volition, but effective
sanctions will be put in place. Membership of the BVCA will be
contingent upon signing up to the Walker Guidelines.
5.2 Adherence with the code is on a comply
or explain basis. This is a critical element to the flexibility
of the structure of the guidelines, and reflects the need to take
account of the rapid change which the industry had undergone in
the last 12-24 months. Firms, who for reasons of competitive disadvantage
(for example, in a bid where a rival bidder does not need to declare
the information) cannot meet all of the disclosure requirements,
will be expected to explain why they cannot comply with the code.
5.3 If a member firm, or one of its portfolio
companies, fails to meet the criteria or provide sufficient explanation
as to why they have not, there will be tough sanctions, including
the application of substantial pressure from the GRMG, public
disclosure, and ultimately, expulsion from the BVCA. We believe
this will provide a tough package of measures, with public disclosure
and censure a particularly powerful tool, given the level of public
attention the industry now faces.
Timescales
6.1 A detailed announcement of the composition,
remit and operation of the monitoring group is anticipated early
in 2008.
6.2 The Guidelines recommend establishing
a whole system of self-regulation. This will take time to implement.
However, the BVCA believes this self-regulatory process will provide
an effective and appropriate framework for compliance. We are
confident that the structure of the group, with a majority of
independents, will reassure all stakeholders of the legitimacy
of the process.
The appropriateness of the proposed level and
type of disclosure for the various stakeholders in private equity-owned
businesses
7.1 It is a principle laid down in statute
that private companies should not be required to make the same
degree of public disclosure as quoted companies. Yet Sir David's
guidelines recommend a lifting for private equity firms, of the
derogation granted to all other private companies in the Companies
Act 2006.[19]
In doing so, it asks BVCA member firms to forego this, as well
as to make a significant cultural shift in adopting these new
practices.
7.2 In recognising the greater influence
private equity now plays in the economy, we appreciate the need
for our larger member firms to communicate with a wider group
of stakeholders.
7.3 The guidelines make recommendations
for three levels of disclosure: GP level reporting, portfolio
company reporting and industry level reporting. Each of these
addresses the concerns of different stakeholders including: investors,
employees, and the general public.
7.4 We believe the levels and type of disclosure
are appropriate for the following stakeholder groups:
Investors (Limited Partners)
8. Limited Partners (LPs), as investors
in private equity funds, already receive a much greater level
of information than do the shareholders in public companies, and
generally agree with Sir David Walker's conclusion that the current
levels of disclosure are sufficient. (See further information
below in Section D "Why investors make different demands
of public companies compared to private equity-owned companies").
Employees
9.1 The additional levels of information
recommended in the report mean the ownership of portfolio companies
will become more transparent, and allow employees—who are
at the heart of the threshold criteria outlined below, under "private
equity companies covered by the code"—to know who is
responsible for management decisions in their company.
9.2 The collection of more authoritative
and comprehensive industry level data, which the report also recommends,
will contain details of levels and changes in employment, and
make clear the industry's economic impact in this respect (See
more information on industry level data below).
The Guidelines also stipulate communication
with employees which is timely and effective at times of strategic
change.
9.3 In addition, the report highlights the
legislation already in place in this area, which provides protection
for employees:
(a) Companies have an obligation under the
Takeover Code to make disclosures in respect of continuing employment,
conditions of employment and pensions provision, in a published
offer document in support of an offer for a company quoted in
the UK.[20]
(b) Information and Consultation of Employee
Regulations (Employment Relations Act 2004). All public and private
companies in the UK that employ more than 100 employees, and more
than 50 employees from April 2008, must set out the rights of
employees to be informed and consulted on a regular basis on important
developments that may affect their interests. The procedures are
triggered by a formal request from employees or at the employer's
initiative by starting the process voluntarily.
We believe that the above measures, taken together,
represent a level of disclosure and communication with employees
which is both appropriate and substantial.
General public
10.1 The range of measures proposed in the
Walker Guidelines mean that more information than ever before
will be accessible by the general public. Information will be
made available on company websites for both private equity firms
and portfolio companies, and this will mean much greater levels
of and access to information about the ultimate owners of portfolio
companies, and the management decisions taken within them.
10.2 The reporting made available on an
industry wide basis will allow the public and wider stakeholders
better to understand the contribution private equity makes to
the UK.
Proposals for a respected capability for providing
comprehensive, industry-wide data on the private equity industry
11.1 The BVCA recognises the need to provide
industry wide data which is comprehensive, independent and respected,
particularly in order to promote better understanding of how the
private equity industry operates, and its impact on the UK economy.
11.2 Sir David Walker makes a number of
specific recommendations about research and data collection that
the BVCA accepts and is planning to undertake. He specifically
recommends that: "The overall capability of the BVCA should
be boosted so that the BVCA becomes the recognised authoritative
source of intelligence and analysis both of larger-scale and of
venture and development capital private equity backed businesses
based in the UK and a centre of excellence for the whole industry".
11.3 This process of strengthening the BVCA's
current research capacity is underway. Further, the BVCA has appointed
Ernst & Young to collect detailed data initially on the 20-30
deals done annually with a total enterprise value of over £250
million, starting with those done in 2006 and going forward. Information
to be gathered is to be, broadly, as follows:
— Year immediately following investment:
general deal information including name, date, deal structure/size,
backers, equity holding, debt/covenants, etc.
— Annual data gathering on portfolio
company: follow-on investment from backers, new capital investment,
acquisitions, tax, sales, EBIT(DA), debt levels, employment levels/changes
and other productivity measures.
— Exit information: date, deal size
and debt levels—including attribution analysis.
— Attribution analysis: Starting with
2007 exits, looking at the proportion of returns generated by
different means (leverage/financial structuring, growth in market
multiples/earnings, strategy and operational management of the
business).
11.4 Data will be disseminated on an aggregate
basis only. The work will be undertaken annually, with results
for each calendar year released in the following May/June.
11.5 The enhanced data collection outlined
above will also enable the BVCA to publish an enlarged version
of the economic impact and associated surveys, currently published,
covering both the industry overall and specifically for larger-scale
private equity businesses.
11.6 We feel that the industry level attribution
analysis is a particularly powerful tool. It will allow an independent
assessment of the contribution of private equity firms to the
whole economy. By breaking down the way the industry makes its
returns into financial structuring, market movements and operational
improvements, it will allow a much clearer view of what private
equity firms are actually doing, and how they create value.
The private equity-owned companies to be covered
by the code
12.1 The guidelines apply exclusively to
private equity firms which are managing or advising funds that
own or control "large" UK companies, or that have a
designated ability to invest in such companies. "Large"
UK companies are those that meet all of the following criteria
at the time of the transaction:
(a) More than 50% of revenues are generated
in the UK;
(b) There are more than 1,000 full-time equivalent
UK employees; and
(c) The company had (at the time of acquisition)
an enterprise value of £500 million (in the case of a secondary
or non-market transaction) OR a market capitalisation, together
with the premium for acquisition of control, in excess of £300
million (in the case of a take private transaction).
12.2 The first estimates indicate that the
guidelines will cover approximately 18 private equity houses and
65 portfolio companies owned by them.
12.3 We are encouraged by the commitment
shown by our member firms to complying with the guidelines. The
process is ongoing. It is expected that once the GMRG is in place
in early January, work will commence on identifying further firms
who have the designated capability to own portfolio companies
of the size specified by the criteria.
C. TAXATION
Tax treatment of debt and equity
13. The distinction between debt and equity
has been established for many years and is accepted in almost
all major jurisdictions. The UK has a vitally important and highly
successful financial services sector, and any general change to
the taxation of equity and debt would need to be considered very
seriously so as not to do damage this.
The Memorandum of Understanding between the
BVCA and HMRC
14. Three memoranda of understanding—or
agreements—currently exist between the BVCA and HMRC: the
1987 agreement, and two MOUs in 2003.
The 1987 BVCA Agreement
15.1 The 1987 agreement provided a framework
for the tax treatment of limited partnerships used as vehicles
for investment in unquoted companies. At the time there was significant
uncertainty regarding the taxation treatment of venture capital
partnerships and consequently most were established outside the
UK. The 1987 agreement provides an effective onshore structure
for investment funds. The structure and agreement has for 20 years
been successful in attracting funds to base their operations in
the UK, and key to the establishment of funds for investment in
UK companies.
15.2 The agreement did not and does not
change the application of the relevant tax legislation but is
based on a long standing HMRC statement of practice. It covers
the UK taxation treatment of managers and investors in the fund
and in particular confirms the tax transparency of venture capital
partnerships, such that profits and losses are taxed at the level
of investors. Therefore, investors and managers are taxed on profits
arising from PE/VC partnerships in the same manner as their other
investments.
The 2003 Legislation and Memoranda of Understanding
16.1 Where employees receive equity, any
gift or undervalue is treated as remuneration but subsequent profits
as capital. Most countries adopt a very similar approach. This
basic principle is fundamental and should be maintained.
16.2 The 2003 legislation tightened these
rules and also introduced PAYE requirements such that in the absence
of action, investors could be left to fund the tax costs. HMRC
did not have the resource to value securities in relation to the
volume of transactions performed in the UK and elsewhere in the
world where UK resident managers invest, particularly as there
was a need for these to be agreed prior to investment. There was
a concern that this would stifle transactions, which are a very
significant part of UK economic activity. Consequently both the
BVCA and HMRC had an interest in agreeing a practical solution
and so two MOU's were agreed. Neither MOU changes the 2003 legislation,
which applies to VC and PE managers in the same manner as any
other taxpayer. Both MOU's simply provide practical answers in
relation to the administration of VC and PE transactions.
16.3 In addition, we note the government
response to the Committees interim report that "on the
basis of the cases seen, and taking into account other anecdotal
evidence, HMRC has no reason to suppose that the original rationale(of
the MOU) is not being followed in the great majority of instances".[21]
Options for further reform of shareholder debt
17.1 The BVCA believes the legislation currently
in place (the "arms length test"), which oversees the
levels of debt in any transaction, and ensures that the level
of debt could be raised independently, is both conceptually right,
and appropriate. We would also point out that, given present market
conditions, the levels of debt in future transactions are likely
to be less significant, and so the need for the arms length test
to be applied will not be as great.
17.2 Moreover, in many transactions, we
believe that the interest relief regime is in fact now tilted
against private equity investors, as compared to corporates. In
many circumstances, a corporate acquirer is able to use not only
the capacity of the target company but also its own assets and
profits, thereby potentially enabling it to borrow significantly
more.
17.3 This should be seen in the context
of the wider corporation tax system. Grouping arrangements for
UK tax purposes allow corporate owners a number of mechanisms
to reduce the overall corporation tax charge of its subsidiaries—for
example, setting off profits in one subsidiary against the losses
of another. Such grouping arrangements are not available to the
private equity investor between portfolio companies.
Further options for the reform of Employment
Related Securities ("ERS")
18.1 As mentioned above, the rules on ERS's
were tightened in 2003. These rules are amongst the strictest
regimes in the world; the only other country which operates a
similar regime is the United States.
18.2 Whilst we believe the aim of the legislation
is correct, there is still uncertainty in its application, and
would like to see further clarity and simplification. For example,
the 2003 legislation includes a number of anti avoidance rules
providing further protection in relation to value shifts in favour
of employees, convertibles which could be used to enhance the
value of employee shares, and a catch-all provision entitled "post
acquisition benefits". These rules are overly complex and
do not take into account the variety of financial instruments
used in practice and the international nature of business. We
suggest that any reform of the rules on employment related securities
should focus on this area.
The appropriateness of the tax regime for private
equity in the light of recent changes to capital gains tax
19.1 Whilst in favour of a simplified and
certain CGT regime, the BVCA is concerned at the increase in tax
to 18% and the abolition of taper relief as it impacts all our
member firms. The 18% rate is higher that most European countries,
and the new capital gains tax rate therefore damages the UK's
competitive position.
19.2 The BVCA is particularly concerned
with the smaller companies sector, and recently wrote to the Chancellor
suggesting how the adverse impact of the new rules might be lessened
in other areas, such as allowing venture capital-backed companies
to qualify for tax reliefs aimed at small companies. This is something
the BVCA has raised in our Pre-Budget Report submission for the
last three years.
D. OTHER ISSUES
Why investors make different demands of public
companies compared with private equity-owned companies
20.1 Investors in private equity owned companies
("limited partners" or "LPs"), are usually
professional institutions, who agree the levels of information
flow with general partners. The limited partners' stake in the
fund is an illiquid asset, and so private equity-owned companies
are able to communicate both historical and forward looking financial
information, which is not the case on the public markets, where
no forecast information is given for fear of legal suits if trading
of securities is done on the basis of the information which then
turns out to be wrong. The level of information flow to investors
in private equity owned companies can therefore be much greater
than in public companies. Indeed the Walker Guidelines document
concluded that "the content and timeliness of information
flow to limited partners is regarded by most limited partners
as fully sufficient".[22]
20.2 In respect of information made available
to the wider public, all UK companies are required under companies
legislation to file reports and accounts at Companies House. It
is a principle laid down in statute that private companies should
not be required to make the same degree of public disclosure as
quoted companies. All private companies (including those owned
by private equity) are required to produce less content and detail
than those that are listed. Private companies are required to
report less frequently and in less detail than those that are
listed, but are still subject to strict prescriptions relating
to content and timing of filing.
20.3 The rationale lies in their different
ownership structures. Private companies generally have a limited
number of shareholders who are often closely connected with the
company. By contrast, the shares in quoted companies are widely
held—BT has well over a million shareholders—and company
law prescribes appropriate levels of public disclosure to ensure
that they are properly informed.
The implications of private equity-funded takeovers
for company pension funds
Background
21.1 There is no legal difference between
a takeover by a private equity firm, and one involving funds from
the public markets. In both cases, the shareholders in the "target"
company sell their shares in exchange for cash, loan notes or
new shares, or a combination of all three.
21.2 There are therefore no "implications"
for company pension funds in a private equity-funded takeover,
which are different from non private equity funded takeovers.
Any non private equity acquirer of a company has to face the same
issues as a private equity acquirer in dealing with the company
pension fund. Similarly, the same safeguards and controls in are
place to ensure that the position of the company pension fund
is not prejudiced by the transaction.
Safeguards
22.1 The Pensions Regulator issued, in April
2005 a "Clearance Guidance" note, which explained how
it intended to use its corresponding powers to make "clearance"
determinations in relation to proposed transactions. That guidance
applies equally to private equity and non private equity acquirers.
This point was reaffirmed in September 2007, when the Pensions
Regulator issued a new draft of the clearance guidance, which
considerably extended the range of circumstances in which the
Regulator states that it would consider using its powers in the
context of corporate transactions.
22.2 In terms of the benefits provided by
company pension funds, there is no evidence to suggest that private
equity acquirers are any more likely to take action which is adverse
to ongoing pension accrual than other types of owner.
Consultation with employees
23.1 New regulations were introduced in
2006 which impose strict consultation requirements on employers
when proposing changes to future pension accrual.[23]
These requirements apply equally to private equity financed employers
as to any other type of employer. Private equity firms take their
responsibilities in this area extremely seriously, and there are
no reported instances that we are aware of where the rules have
been abused.
23.2 In addition, and as the Walker Guidelines
point out: the Takeover Code makes obligations on
"disclosures in respect of continuing
employment, conditions of employment and pensions provision in
a published offer document in support of an offer for a company
quoted in the UK".[24]
Scheme wind-ups
24. When a defined benefit pension scheme
enters into winding-up, its sponsoring employer is required by
law to pay up any deficit in relation to the cost of securing
the benefits in full with an insurance company. The fact that
some employers have been unable to meet that deficit either wholly
or partially as a result of the employer's insolvency says nothing
about the cause of the insolvency.
The operation of TUPE in private equity takeovers
Background
25.1 TUPE (Transfer of Undertakings (Protection
of Employment) Regulations 2006) was put in place to comply with
EU legislation in order to make sure that when a company sells
a business to another company, in an "asset sale", the
employees who work in that business have their jobs and terms
and conditions of employment protected.
25.2 The basic intention is to ensure that
employees are not denied their employment protections by being
left behind in a company which no longer operates the business
that they work in because that business has been sold.
Application to private equity
26.1 TUPE applies to all "asset sales",
so it applies to all companies, including ones that are private
equity-backed.
26.2 Usually, however, when one company
wants to buy another (including when a private equity firm backs
a buyout) it will buy the shares of that company, rather than
its assets. It is a "share sale" rather than an "asset
sale". In the sale, the company remains intact and just has
a new owner. The company still owns the assets, and still employs
the employees, who retain all their employment protections. There
is therefore no need for TUPE.
Extension of TUPE to "share sales"
27.1 The BVCA does not believe this is necessary
because TUPE was brought in specifically for non share sales,
as above. Furthermore, other legislation already protects workers'
employment rights, and gives them access to information and rights
to consultation, and those protections apply after a share sale
just as they do at any other time (see above).
27.2 Employees retain their existing employment
protection and the identity of their employer does not change.
In relation to any concerns regarding potential job losses, existing
employment legislation already requires information and consultation
with employee representatives where 20 or more job losses are
envisaged. This is similarly the case in respect of concerns regarding
pensions, where significant changes are intended (see above).
27.3 Finally, TUPE regulations were last
updated in the UK in 2006, following an extensive consultation
process. And as recently as June of this year, the European Commission
concluded that there was no justification to extend the directive
to a change of ownership of shares.
Market abuse and conflicts of interest in private
equity transactions
Market abuse
28. Market abuse relates to shares, debt
or other instruments traded on public markets. Private equity
and venture capital transactions do not generally involve public
markets. A private equity firm is therefore most likely to acquire
inside information in public-to-private leveraged buy-out transactions,
occasional private investments in public equity or exits by floatation.
The potential for leaks
29. The FSA has undertaken work in this
area (notably in Feedback Statement 07/3), and we understand their
principal concern relates to leaks. Private equity firms rarely
launch a hostile bid. They therefore need to conduct due diligence
to protect the interests of their investors. We have seen no evidence
that the likelihood of a leak is any greater where a private equity
firm is involved, than in the context of any other public market
M&A activity. Nor is there any evidence that leaks come from
the private equity firms. In the vast majority of cases, leaks
are absolutely not in the firms' interest.
The interests of private equity firms
30.1 Confidentiality is vital to a private
equity bidder. Confidentiality agreements are a common feature
of the market. Prior to a buy-out, a private equity firm will
derive no benefit from the leak of the fact of its interest in
a particular listed company. Indeed, a leak will almost certainly
create a speculatory bid premium, which will cost the private
equity firm money.
30.2 Where a private equity firm holds securities
admitted to trading following an IPO, any preferential access
to information will cease, information held by the firm prior
to the IPO will be disclosed in the offering documents, and the
situation will be no different to any other holding of listed
shares. There are also obvious attractions for private equity
firms in well-respected, transparent and efficient markets which
provide good opportunities for exits.
30.3 In addition, under Rule 20.2 of the
Takeover Code, there must be "equality of information"
in the bid process, and so all information disclosed to one bidder
must also be disclosed to any other bona fide bidder. This is
in order to ensure that all shareholders are treated equally during
all takeover bids, not just those involving private equity.[25]
BVCA activity
31.1 All BVCA-member private equity fund
managers in the UK are authorised and regulated by the FSA. In
common with other investment managers, they are subject to transaction
reporting obligations to the FSA.
31.2 The BVCA believes that member firms
are aware of the controls over confidential and price-sensitive
information advocated by the FSA. The BVCA recently held a seminar
on this issue for firms, and we understand that firms are reviewing
and improving their controls in cooperation with the FSA.
Conflicts of interest
32.1 The BVCA believes that commercial pressures
mean that potential conflicts of interest in private equity arrangements
are largely well managed. The industry has developed with an emphasis
on transparency to investors (see earlier paragraphs 21 and 22).
It is vital to appreciate that:
— the clients of a private equity firm
are the funds which it manages; and
— the interests of investors are paramount.
32.2 It is also important to note that the
other participants in private equity transactions will invariably
retain their own professional advisers to secure their interests.
Investors
33. Investors are almost always sophisticated
institutions, advised by lawyers, and others, who negotiate appropriate
controls over potential conflicts. Often controls include an obligation
to refer potential conflicts to a panel of representative investors.
Normally, all investors in a private equity fund participate on
the same terms.
Remuneration structures
34. Carried interest and similar executive
co-investment structures are a feature of private equity funds.
These arrangements are usually the most heavily negotiated by
investors, with executive co-investment almost always on the same
terms as the investors in the fund.
Investee companies and representative directors
35. Where private equity executives join
the board of an investee company, they may encounter a personal
conflict between the obligations they owe to their employer-firm
and fiduciary obligations owed to the investee company. The issue
is identical to that in any other corporate structure in which
a shareholder puts a representative on the board of a subsidiary.
Long-established controls include provisions in a company's articles
of association for formal disclosures of interests and for directors
to recuse themselves from certain decisions.
BVCA activity
36.1 The BVCA and individual member firms
have been working closely with the FSA in developing a common
understanding of the nature and risks of conflicts of interest
in the context of private equity. In addition, the FSA is currently
consulting a wider range of firms on the topic.
36.2 In addition, those private equity firms
subject to the Markets in Financial Instruments Directive (MiFID)
have been reviewing and developing their formal conflicts of interest
policies as required by the Directive, and the BVCA has recommended
that other member firms take a similar approach.
36.3 Finally, this area forms part of the
Walker Guidelines on transparency. In producing an Annual Report,
a private equity firm must communicate, inter alia: "that
arrangements are in place to deal appropriately with conflicts
of interest, in particular where it has a corporate advisory capability
alongside its fiduciary responsibility for management of the fund
or funds".[26]
December 2007
17 Government response to Interim Report on Private
Equity, p 5. Back
18
The Occupational and Personal Pension Schemes (Consultation by
Employers and Miscellaneous Amendment) Regulations 2006-2006 No
349. Back
19
Of the need to produce a Business Review, Companies Act 2006 Section
417 (5). Back
20
This obligation reflects the requirements of the European Union
Takeover Directive (2005) carried into legislation in the UK through
Chapter 1 of Part 28 of the 2006 companies legislation. Back
21
Government response to the Interim Report on Private Equity, p
5. Back
22
Walker Guidelines on Disclosure and Transparency in Private Equity,
p 3. Back
23
The Occupational and Personal Pension Schemes (Consultation by
Employers and Miscellaneous Amendment) Regulations 2006-2006 No
349. Back
24
Walker Guidelines on Transparency and Disclosure in Private Equity,
p 26. Back
25
Takeover Code, Rule 20.2: "any information| given to one
offeror or potential offeror ... must, on request, be given equally
and promptly to another offeror or bona fide potential offeror
even if that other offeror is less welcome". Back
26
Walker Guidelines for Transparency and Disclosure in Private Equity,
p 26. Back
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