Private equity and corporate governance
Gurpreet Manku is the BVCA’s Assistant Director General and Director of Policy writes:
Private equity and venture capital funds managed in the UK by BVCA members currently back around 3,200 companies, employing some 448,000 people on a full-time equivalent basis in the UK. From 2012 to 2016, our members invested over £27 billion in nearly 3,800 UK-based companies.
The BVCA recognises that there have been examples of corporate failures where it appears that corporate governance has not worked in the way it should. As well as impacting on the reputation of UK businesses, this has led to an erosion of public trust which now needs to be restored. It is, however, important to remember that there are also many examples of well-run companies where there are robust and effective governance structures in place which have helped create long-term value.
Private equity and venture capital firms are long-term investors, typically investing in unquoted companies (often referred to as ‘portfolio companies’) for around three to seven years. This is a commitment to building lasting and sustainable value in business. Firms seek to introduce and strengthen existing corporate governance arrangements that are in place in the portfolio companies in which they invest. This allows them to effectively monitor and manage their investments from a strategic perspective. It is also worth noting that for the firm itself, the benefits of good governance at a portfolio company level are intrinsically linked to its own success. It protects and enhances the value of investments which is important from a reputational perspective, especially as the firm will need to fundraise in the future to secure its own longevity.
Corporate governance will be reviewed by the private equity firm in the due diligence stage of its investment and it will implement changes soon after the acquisition of the company. The arrangements introduced will be bespoke and will depend on a number of factors. These include the stage the company is at in its development (e.g. professionalising arrangements at a founder-owned business, preparing a company for an eventual listing on a public market, etc), whether the company operates in a regulated industry, the markets in which the company operates, the risk profile of the underlying business and products, and more. The intention is to implement a governance structure that is self-regulating with an emphasis on creating the right culture that ensures the effectiveness of the arrangements put in place.
Private equity and venture capital firms have embraced the responsible investment agenda and the focus by our industry on measuring, managing and mitigating ESG risks, as well as seizing the opportunities that good governance provide, continues to grow. The BVCA has published a number of guides and case studies on this area including a responsible investment toolkit.
In addition to the above, the industry has over the past decade voluntarily increased the level of public narrative reporting for portfolio companies within the scope of Sir David Walker’s Guidelines on disclosure and transparency in private equity. In 2007, the BVCA commissioned Sir David Walker to establish Guidelines that provide a framework for the private equity industry to enhance stakeholders’ understanding of our activities and address concerns about a lack of transparency in the industry. These stakeholders include government, regulators, media, employees, customers and the public more widely. This was in response to the increased scrutiny and negative publicity the private equity industry faced in 2007 from the media, trade unions and politicians, culminating in Treasury Select Committee hearings that same year. Enhanced reporting by the largest UK portfolio companies, and disclosures by private equity firms on their investment approach, helps to demonstrate that they are responsible owners and builders of businesses. The positive reputational impact benefits the portfolio company itself, as well as its owner, and the Guidelines support those portfolio companies with reporting ahead of a listing on a public market.
The Government’s recent green paper on corporate governance reform acknowledges the efforts by the BVCA in improving transparency and we were delighted to join the coalition designing corporate governance principles for large private companies. The principles will need to recognise that the nature of the relationship between shareholders and listed companies is very different to that between a private equity-backed company and its shareholders. Therefore, some of the UK Corporate Governance Code requirements may not be applicable to or appropriate for private companies. The corporate governance principles for private companies will need to be adaptable and flexible as this would in turn encourage the adoption of the principles and support UK businesses and their stakeholders.
Gurpreet Manku is the BVCA’s Assistant Director General and Director of Policy. The BVCA is the industry body and public policy advocate for the private equity and venture capital industry in the UK. With a membership of over 680 firms, the BVCA represents the vast majority of all UK based private equity and venture capital firms, as well as their professional advisers and investors.