Invest Europe (formerly the European Private Equity and Venture Capital Association (EVCA)) has recently published a new version of its Professional Standards Handbook, setting out its updated standards and guidelines for the private equity industry.
The Handbook brings together the key elements of governance, transparency and accountability that are expected of industry participants. It provides guidance on the principles that should govern professional conduct and the relationships between all those engaged in the industry, with a particular focus on the relationship between those general partners operating the funds and their investors, and between general partners and portfolio companies. It also takes into account the new regulations in Europe, including the AIFMD, which came into force since the last detailed update of the Handbook in 2013.
The updated Handbook was created by Invest Europe members, which include private equity firms and their institutional investors, as well as industry advisors, working in collaboration for over a year.
Revisions to the Handbook
As part of the Handbook revision, Invest Europe has published substantially updated guidelines for reporting by private equity firms to their investors, which emphasise the importance of clear and detailed disclosure of fees. As well as increasing transparency, the guidelines encourage additional reporting to address areas of non-financial disclosure, including environmental, social and corporate governance (ESG), and enhanced clarity on reporting metrics. The guidelines also reflect advances in accounting standards since the last update.
Amendments to the version published in January 2014 include:
- the amendment of section 3.3 (Investing) to emphasise the potential for value creation (in addition to exit opportunities), and the environmental, social and corporate governance factors that the GP should consider in its approach to responsible investing;
- the amendment of paragraph 3.3.7 (GP's consent to portfolio company actions and board appointments) to recommend that the GP also consider requiring the portfolio company to obtain investor consents for, in addition to other matters, major outsourcing contracts, transactions between the portfolio company and portfolio company management or other related parties, and ESG issue that could have a material impact on the investment or the risk profile of the investment;
- the amendment of paragraph 3.4.2 (Environmental factors) to expand the environmental factors the general partner should consider in relation to the management of the fund's portfolio companies;
- the amendment of paragraph 3.4.3 (Social factors) to expand the social factors applicable to the conduct of the fund’s portfolio companies;
- the amendment of paragraph 3.4.10 (Follow-on investments) to specify that, due to the inherent conflict, it is generally not advisable for follow-on investments into a portfolio company (for example, to fund expansion plans or to re-finance a poorly performing portfolio company) to be made by a different fund from the fund which made the original investment (although it may be possible in certain cases on a fully transparent and agreed basis with robust safeguards);
- the amendment of paragraph 3.4.11 (Underperforming investments) to specify that when managing an underperforming investment, the general partner should ensure that adequate local legal advice has been sought and that the portfolio company remains in compliance with all applicable legal and regulatory requirements, including where they relate to ESG factors. Directors who are not familiar with the specific legal requirements in turnaround, restructuring or insolvency situations (or the specific jurisdiction where the portfolio company is located) should seek legal advice in due time;
- the insertion of a new paragraph 3.4.12 (Factors particular to investing in distressed assets), covering the particular considerations should be taken into account when establishing, investing and managing a fund dedicated to investing in distressed assets; and
- the amendment of paragraph 3.5.1 (Implementation of divestment planning) to include a recommendation that in preparing for a portfolio company exit, the GP should also consider any ESG factors that may be relevant, either for the portfolio company itself or a future buyer of its shares.
This year’s revision of the Professional Standards Handbook also incorporates detailed input from Invest Europe’s Responsible Investment Roundtable, whose members incorporated enhanced coverage of environmental, social and corporate governance considerations relating to every stage of the investment cycle.
All Invest Europe members are required to adhere to the Handbook’s Code of Conduct, a set of fundamental principles, which remain unaltered from prior editions. The Handbook also continues to endorse the International Private Equity and Venture Capital Valuation Guidelines as the basis of portfolio valuation in the industry.
The Handbook is a dynamic document that is maintained by the Invest Europe Professional Standards Committee, which will formally review it on an annual basis. Invest Europe may also issue updates to the handbook to reflect industry developments.