Every year since 2008, a semi-independent body established by the BVCA, the UK’s private equity association, has monitored corporate reporting by the largest private equity-backed companies. Every year that group issues a report outlining how these companies measure up to the reporting standards set by the best performers in the FTSE 350 (the 350 largest companies listed on the London Stock Exchange). This year’s (10th) report – published last week by the Private Equity Reporting Group (PERG) – has revealed a mixed picture: overall levels of compliance by BVCA member firms were judged to be good, but some aspects of non-financial reporting were in need of improvement. That is concerning not only because of the increasing public interest in the environmental and social issues that are covered by narrative reports, but also because more detailed disclosures, covering a wider range of topics, are likely to be needed in the future. For example, the requirements of the European Union’s Non-Financial Reporting Directive have raised the bar for listed companies, and UK companies (both public and private) will also start to feel the effect of required gender pay gap reporting next year.
Companies backed by a private equity firm (or an outfit considered to be “private equity-like”) will be within the scope of the Guidelines for Disclosure and Transparency in Private Equity – and therefore covered by the annual report – if they were acquired for at least £210 million (€238m) in a take-private deal, or had enterprise value of at least £350 million (€397m) if acquired in a private deal, and in either case generate more than 50% of their revenues in the UK, or have at least 1,000 UK employees. In 2017, 52 portfolio companies were caught by the Guidelines, and around one-third of those were sampled to measure their compliance. Although one-fifth of the companies sampled were not PERG-compliant, the report says that all sampled companies owned by BVCA members had complied.
Two of the areas singled out are likely to become increasingly important: human rights and gender diversity. These are issues of increasing focus for investors, as well as for the media and politicians, and narrative reporting on them is becoming more detailed and sophisticated among public companies. Private equity-backed companies will have to work harder to keep up.
To be fair, human rights disclosures are still a developing area even among the largest companies. The UK’s standard-setter, the Financial Reporting Council (FRC), refers companies to the UN Guiding Principles on Business and Human Rights, which include an expectation that companies will make human rights disclosures, but do not address the nature of that reporting in any detail. The most recent draft FRC Guidance also emphasises the importance of reporting on supply chain human rights risks, which are increasingly material to a company’s financial performance and legal compliance, but is also not particularly specific.
Fortunately, more specific guidance does exist: the Global Reporting Initiative, endorsed by the UN Global Compact (the world’s largest corporate responsibility initiative) and one of the frameworks referenced in the EU’s Non-Financial Reporting Directive, is one source; the HR Reporting Assurance Framework Initiative, developed by some of the authors of the Guiding Principles, is another.
On the other hand, if human rights disclosures are complicated, the basic reporting requirements for gender diversity are pretty straightforward for public companies, mandating various quantitative information on the number of employees of each gender. But with the current focus on gender diversity, including within the private equity industry, and the new requirement for all organisations with more than 250 domestic employees to publish their “gender pay gap”, outsiders are likely to pay more attention to gender diversity reporting information. Indeed, the FRC has also indicated (for example, in its most recent consultation on the Corporate Governance Code) that it is also focused on other types of diversity, particularly at senior management level.
There is no doubt that narrative reporting is becoming increasingly important for all European companies – public and private – and businesses can expect more scrutiny of what is in, and what is missing from, their annual reports. Transparency is the order of the day. Private equity can confound its critics and lead the way, and last week’s PERG report demonstrates that most private equity firms are on the right path. But the report (and other global reporting frameworks) will also help sponsors and their advisers who want to stay ahead of the curve – which is where many of their investors want them to be.
European Funds Comment will take a break and will return in January. We wish all our readers a very happy and relaxing holiday season.