In November last year, Sir
David Walker published his report on private equity on behalf
of the BVCA. At the time, critics poured scorn on the
guidelines it contained, arguing that they did not go far
enough. Ironically, this brought a focus back onto private
equity despite the code being designed to mollify
But then sub-prime mortgages, Northern Rock, sovereign
wealth funds, Bear Stearns and a string of other issues pushed
private equity off the front pages.
Jeremy Hand of Lyceum Capital is chairman of the BVCA. Here
he explains the initial success of the voluntary code of
conduct and how the designated committee that makes sure that
the guidelines remain relevant.
Could you describe your role at the
We have gone through a lot of changes in the last 12 months.
The role of the chairman, now we have a high quality CEO and
COO, is to ensure that we are delivering what members want.
We've reorganised the structure and its committees to ensure
that there is a relevant, high quality group of practitioners
from the venture end, from the mid-market end and from the big
buy-out end. They have to fit together.
We then have technical committees tax, regulatory,
investor relations, legal which, together with the
executive team itself, deal with communication, public affairs,
research, training and events. My job is to ensure that what
the members really want is what they are getting from the
How is the implementation of the voluntary code of
Following the Walker review and the formation of the
Guidelines Monitoring Group (Rake Committee), we are ensuring
that the self regulation regime we introduced is going to be
properly implemented by our members on the bigger deals. And
that is going well. But that is less of a priority now, as it
has happened pretty much across the board.
How successful has the code been?
I think it has been successful and the early adopters have
done an outstanding job firms like Terra Firma and
Permira. You now get more from the Terra Firma report than you
would do from any public company report. It is an outstanding
There has been impressive adoption of the code as well. The
bigger buy-out members have all adopted it. And many other
mid-market firms have decided to comply on a voluntary basis.
There has been very little dissent from the core. Now it is a
question of making sure that it all gets pulled together, which
seems to be happening. It is still early days; we've got to
make sure it happens. Then we've got to make sure the
communications around it are good so that we don't lose
The process seems to have been smooth. Have their
been any stumbling blocks?
Most private equity houses seem to be behind what we are
doing. People realise that it is a completely different
landscape today than 24 months ago or 12 months ago. People
have genuinely woken up to that. Private equity makes its money
by evolving quickly and changing. People have realised that
they need to be transparent and communicate better.
Do you think the code will stand up to examination
if the industry picks up again?
One of the Rake Committee objectives is to ensure that the
code remains relevant. They continue to review how appropriate
it is. The committee is made up of five people: three
independents (one of whom is a trade unionist) and two
well-respected private equity guys. So as a group, they can
look at the merits of the code in a detached and objective
We welcome the ability for the code to change over time. We
are entering trickier, choppier waters from an economic point
of view and although there have been no major private equity
blow-ups so far, the industry will have to adapt. Problems will
have to be dealt with in a grown up, sensible way.
There could be some disappointments over the next 12 to 24
months. How those things are reported on and how the media, the
boards of the companies and the private equity sponsors handle
that process will be key.
People are beginning to say that as private equity takes on
more leverage it is more vulnerable in a downturn. But the
reality is that private equity drives a robust balance sheet.
It also brings in additional management practices and the
business is a lot better.
But more will be needed to support the code in the future.
That's why I think the failure rate among buy-outs is not going
to be anything like as bad as some people predict.
Is there an appetite for this code
That is a very good question. The events in the UK over the
last 12 months have been experienced elsewhere around the
world, not just in Europe. Especially in places like Australia
and South Africa. People are looking very carefully at the
Walker report and the subsequent code, how people comply with
it and what it means to them.
Remember, the industry is tremendously global, many
companies based in the UK have a pan-European focus and if the
system works in the UK they will want to do a similar thing in
But there is always opposition. In Europe there are two bits
of legislation being considered private member's bills
if you want that are highly hostile to private equity.
They disregard what we have done in the UK, but I think it is
because they don't really know about it. They certainly haven't
focused on it. They want pan-European curbs and restraints on
private equity. Not just on the reporting, but on things like
leverage. There are some very emotional terms used.
One is called the Rasmussen report and the other is the
Lehne report. I think they will be unsuccessful because they go
too far. There isn't widespread support for them. But it does
show the direction of travel some people have in mind. Only
last month, German Chancellor Angela Merkel gave a very
anti-business, anti-free trade interview and although it didn't
single out private equity it did mention pan-European
legislation to control the free market. From my point of view,
it is all bonkers.
IFLR's recent corporate counsel poll found that 40% of
companies in Europe would like the UK code to be adopted in
their country. That proves an appetite for a voluntary
I think that's right. The UK code does everything that
people were calling for in terms of transparency and
disclosure. And many recognise that it is realistic to take it
from the UK. What we have created could easily be copied.
Unfortunately, politicians today think that introducing laws
and regulations is the way to improve the world. I understand
there are now eight different laws passed every single week in
the UK. It is just as bad in Europe. So companies may welcome a
code, but some governments will continue to push for more
stringent regulation which is a shame as we do not consider
Regarding enforceability, is it still the case that
BVCA members can be threatened with expulsion if they don't
comply with the code?
It is a 'comply or explain' regime. If people don't comply,
then we will listen very carefully as to why they can't comply.
Integrated finance deals are a good example of this. If a
private equity house invests in a company with the assistance
of an existing shareholder, it could be hard to comply. If the
shareholder doesn't want to comply and you can show that you
made strenuous efforts to persuade them, then it might be
unfair to punish the private equity house. If the controlling
investor doesn't want to comply, you can't force it to.
So, we will take it on a case-by-case basis. Ultimately, the
biggest sanction is to be held up to public scrutiny. Firms'
limited partners are going to want to know why they think they
are so special they do not have to comply with rules that the
limited partner community as a whole thinks are a good
Plus non-compliers would have to face the media and public
opprobrium. Questions like: 'why don't you want to? You don't
have a decent excuse.' That is the biggest sanction. If it
reaches that point, we would have no compunction whatsoever in
expelling someone from the BVCA. But I think that would be the
least of their worries.
With the focus off private equity at the moment,
what else does the BVCA have planned?
The interest in private equity has been overtaken by
Northern Rock, sub-prime mortgages and the like. We can now get
on with doing our job properly; persuading people that private
equity is good for Britain is an ongoing project. We have to
produce some high-quality research to prove that. There is a
hell of a lot of work going on and a lot of resource has been
put into the BVCA. We are in the process of hiring a top
economist who can drive the research effort that will explain
to people, not just with anecdotes but with hard facts, that
what we do is good.
Another big job is re-launching the venture end, because it
has been rather neglected in the last 12 months or so. There's
a really good story to tell there. So again, a bit of research
is needed to draw that out. Britain needs to be able to compete
with the US, Israel and other countries where the venture
economy is possibly more prosperous.
What would encourage growth in venture
We reconstituted the Venture Committee and are focusing on
specific research. We need to tell people that the returns from
the venture end aren't as bad as they think they are.
It is also important to point out that there is a lot more
that the government can and should be doing. There isn't a
politician alive that doesn't say wonderful things about small
business, and yet we know there is too much regulation and a
really complex and inconsistent tax regime.
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