United Kingdom: Don't be too optimistic

Author: | Published: 1 Jul 2008
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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 opposition.

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 BVCA?

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 executive team.

How is the implementation of the voluntary code of conduct going?

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 example.

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 ground.

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 way.

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 internationally?

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 other jurisdictions.

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 code.

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 this appropriate.

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 thing.

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 capital?

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.

Nicholas Pettifer 
Staff writer

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