Private equity disclosure

Opacity in private equity is a vexed issue. We don't know much about returns that private equity firms make out of businesses they run, who are the ultimate owners, how value is created.

Private equity justifies this lack of transparency essentially by saying: returns and other financial information are for owners, others have no business to demand information. Following criticism of the ways of private equity firms, the industry in UK responded recently with a voluntary code of disclosure.

In an analysis in FT, Chris Higson, a professor at London Business School, says the disclosure offered is inadequate. In particular, the industry is willing to disclose how value was created in the aggregate but is unwilling to do at the level of a particular unit. That would have meant shedding light on which stakeholders lose out when shareholders gain hugely.

Higson is scathing about the industry's stand that financial information is meant for owners. Not so, argues Higson. Almost any business has an obligation to practice a certain level of transparency because several stakeholders are involved, not just owners or shareholders:

As a matter of fact, both US Generally Accepted Accounting Principles and international accounting standards emphasise that financial statements are aimed precisely at those people who do not have the close and easy access to the business that private equity partners do; also, that investors, creditors, managers and employees all have similar information needs since they all make risky investment decisions. Moreover, the entitlement of all to receive its financial statements is long-established in UK law, whether a company is public or private.

....Of course, privacy concerns apply with equal force to acquisitions by sovereign wealth funds, private individuals or families. The working assumption in the 20th century was that most businesses of any importance would be public, with the disclosure and scrutiny that brings. But the eclipse of public equity markets challenges those assumptions. Critics talk about companies “going dark” after private equity acquisition. Unless we understand the importance of transparency, and unless there is political will to protect it, more business activity will pass into shadow.