The Private Equity Reporting Group (“the Group”), the body established to review the private equity industry’s conformity with the Walker Guidelines, has published its ninth annual report on disclosure and transparency in private equity.

The Walker Guidelines were first introduced in 2007 and require certain private equity firms and their larger portfolio companies to meet enhanced rules on disclosure on a ‘comply or explain’ basis. The Walker Guidelines also require enhanced narrative reporting by certain portfolio companies of those firms. The Group monitors the ongoing relevance of the Walker Guidelines and industry compliance with them. The Group's objective is to ensure that all companies covered by the Walker Guidelines report to a level comparable to current good practice in the FTSE 350, with an emphasis on the better performers in that group, typically the FTSE 250.

Summary of Ninth Report

The Group's key findings, as set out in the report, include the following:

  1. The overall quality of portfolio company disclosures fell substantially, with 57% of the 21 companies sampled failing to achieve an overall good or excellent rating (compared to 95% in 2015). The Group attributes this decline to continued improvements in corporate reporting by the Group's benchmark, the FTSE 350, as well as the fact that nearly half the companies sampled were new to the process. The Group wants portfolio companies to aspire to standards of disclosure above those observed in the FTSE 350.

  2. Portfolio companies have not improved the quality of disclosure in any single criterion of the Walker Guidelines. This may partly be due to lack of awareness of the revised reporting obligations (this is the second reporting year following amendments made to the Walker Guidelines in July 2014 to reflect the replacement of the business review with the strategic report), but is again also due to increased performance in the FTSE 350 and the fact that portfolio company standards were much higher in 2015. Nearly half of all portfolio companies failed to include a human rights or gender diversity statement in their annual accounts. Although these omissions were later addressed through website publication, this again highlights the need to increase awareness of the Walker Guidelines' requirements.

  3. In line with earlier years, only 40% of portfolio companies included a statement of compliance in their annual report and financial statements.

  4. 20% of companies did not make their audited report and accounts available on their website in time for the Group report. The Group also notes that substantially fewer companies are publishing their accounts within six months of year-end and more than half failed to publish a mid-year report. The Group has announced its intention to start to name publicly, in its 2017 report, those companies that fail to meet these requirements going forward.

The Chairman of the Group, Nick Land, said in the press release accompanying the Report, “In the current environment there is an increased emphasis on the transparency and conduct of the largest privately-held businesses in the UK, leading to the recent publication of the Government’s green paper on corporate governance. Given its experience with the Walker Guidelines, the private equity industry is well placed to demonstrate how good practice in narrative reporting can be applied to private companies. Against this backdrop and the improving standards of reporting seen in the FTSE 350, the benchmark for judging companies covered by the Walker Guidelines, it was disappointing to see the overall quality of disclosures by portfolio companies fall this year. The industry must, therefore, increase its efforts to improve the quality of reporting in 2017.”

Next Steps

During 2017, alongside its continued support and education of the industry on implementing the revised Guidelines in practice, the Group will consult on whether and how to amend the Walker Guidelines following the implementation of the EU Non-Financial Reporting Directive in 2017. It will also continue to monitor other changes in narrative reporting, including the potential impact on the Guidelines of the BEIS green paper on corporate governance reform (the subject of last week’s Equity Issues).