Although academics tend to agree that, on average, private equity-backed companies perform better than their peers, the reasons for that success are still hotly debated. Earlier studies generally focused on more easily measurable potential success factors, while the impact of corporate governance was somewhat overlooked. But – as the governance of large private businesses has come under greater scrutiny from policy-makers – many are looking in more detail at corporate governance practices in the private equity sector. That will be instructive: it is self-evident that better governance builds better businesses, and private equity has honed its skills and learnt from its collective experience.
In the UK, calls for more regulation of the governance of “large” private businesses (including those organised as Limited Liability Partnerships) have gathered pace and, in a recent Green Paper, the government has tentatively proposed that a voluntary “governance code” should be drawn up and applied to certain privately-held, economically significant companies and LLPs.
Of course, whether that is a good idea depends entirely on what the code says, and how prescriptive it is, but in principle some guidance – which is high level and tailored to private companies – could be very helpful. Industry associations can, and no doubt will, provide expert assistance to any regulatory intervention in this area, but the government must ensure that it does not constrain the ability of sophisticated actors to craft appropriate governance mechanisms which are suited to the needs of the business concerned. “One size fits all” rules (even if notionally voluntary) will do more harm than good.
The UK government’s Green Paper is not just concerned with internal decision-making structures, but also with disclosure and transparency – and in this respect specifically identifies the private equity sector as a leader. The Guidelines for Disclosure and Transparency in Private Equity (commonly known as the Walker Guidelines, after Sir David Walker who wrote the original version in 2007) establish an expectation that the largest private equity-backed companies will conform to the reporting standards achieved by the UK’s largest listed companies, the FTSE 350. Such reporting is important because, as the UK government points out, stakeholders other than shareholders have a legitimate interest in knowing what big businesses are doing. An extension of enhanced reporting to other private businesses now seems likely, at least in Britain.
In this respect, the private equity industry itself has room for improvement. The semi-independent Private Equity Reporting Group (PERG), which monitors compliance with the Walker Guidelines, has just published its ninth report, and its conclusions do not make for comfortable reading. The quality of disclosures by the 21 sampled companies fell “substantially”, with just 57% receiving an overall good or “excellent/best in class” rating, down from 95% last year. According to PERG, this is partly because of the number of companies reporting under the Guidelines for the first time, and partly because FTSE 350 companies (the benchmark used by PERG) have themselves improved their reporting. But, given that PERG urges improvements to narrative reporting on such politically important issues as human rights (in particular, modern slavery) and gender diversity – and given the increased public scrutiny of private companies – the industry would do well to heed this wake-up call.