The whole point of the private-equity markets, you might think, is that they are private. If they are to be exposed to the same levels of scrutiny as the listed-securities markets, then they become every bit as quaintly oxymoronic as “public schools” or, for that matter, “public services”. No one in their right mind would advocate a return to the days when private investors could do largely as they pleased, with little or no financial regulation, but there is a powerful investment cadre that believes that both companies and investors benefit from being relieved of the unnatural demands of the Stock Exchange.
Now all this is being called into question by some nasty precedents that are apparently set by the Freedom of Information Act (FoIA), which came into force at the turn of the year. The legal precedent pacesetter is the internet information provider Private Equity Intelligence, which is making it clear that, under the provisions of the new Act, local authority pension funds now have an obligation to release performance data for the private-equity funds in which they are invested.
This hasn’t so much set a cat among the pigeons as a regulatory attack-dog among the fat-cats of private equity. There is a sense in which private-equity fund managers believe themselves to be above – or perhaps below the radar of – the vulgarities of investment performance tables. This is not simply because they are accustomed to losing venture capitalists’ cash in secrecy – they would hardly be attracting so much growth capital, in contrast to the Stock Exchange, if that were the case – but rather that their investment cycles aren’t like the comparatively boring, listed-equities markets. Their risk/reward ratios are invariably more highly geared, they can take a longer-term view than their colleagues at the Stock Exchange and, consequently, they can and do have the odd year of negative returns that would never be tolerated by investors in listed equities. To compile quarterly or even annual performance tables for them is, quite simply, to miss their point.
I have to admit that I’m ambivalent about all this. Clear and demanding disclosure in the US – and particularly in the wake of the Sarbanes-Oxley regulations that followed the great recent financial scandals, such as Enron – has done the markets little harm and a deal of good. Over here, the more enlightened and successful of venture capitalists, such as Permira, that have had such a rejuvenating effect on the shares of some of our publicly listed retailers, are all for limpid disclosure. They argue that they have met such demands in the US and – so long as the UK requirements are the same, with private-equity funds reporting overall returns, but not details of individual investments – they are happy to go along with the development.
To that, I would add the view that if the UK pensions industry is to recover from the widely held view that it is staffed by indolent, self-serving incompetents, who bear much of the responsibility for bringing the pensions crisis on British society – with their contributions holidays for large corporations during the boom times that they seem to have believed would never end – then a little more stringent regulation is no bad thing. The new Pensions Act, which will be applied from April, will force the sleepy band of pension-fund trustees to raise their games and doubtless many of the dead-heads of the industry will be having to spend more time dead-heading their roses. Hurrah for that.
And yet I have reservations about this aspect of the fall-out from the FoIA. The Act only applies to information held by public institutions, so the release of private-equity information will be confined to those venture capitalists that become exposed to the investment policies of local authorities. To this extent, some private-equity managers could find themselves releasing greater financial information than is required of equivalent managers invested in the public-equity markets. Local authority fund managers control some &£90bn in assets – to discourage investment from this pool in the private-equity markets is dangerously to hobble one of the more exciting developments of recent years in the capital markets. Similarly, for local authority fund managers to be shunned by publicity-shy venture capitalists is to disbar a new generation of pension-fund management from the opportunity to make some very worthwhile returns.
That last point has an important knock-on effect. For a Government supposedly passionately committed to improving public services, its introduction of the FoIA has had the potential effect of restricting the investment options of local authorities. In turn, that means that British industry will continue to suffer from the economic and infrastructural effects of under-investment in public services.
By all means let’s go for clear disclosure in the private-equity markets. But let’s be equally clear what it might cost us.
George Pitcher is a partner at communications management consultancy Luther Pendragon