The private equity industry has been under intense scrutiny for well over decade, and that scrutiny increased in the immediate aftermath of the global financial crisis. Indeed, policy-makers decided then that the sector had been too lightly regulated in the past and took dramatic steps to change that. Self-regulation, it was argued, was not enough: external scrutiny is the only reliable way to protect outsiders.
Whether the new European rules have really been effective in protecting outsiders is a matter of some debate (to put it mildly), and an evaluation of the Alternative Investment Fund Managers Directive recently commissioned by the European Commission will address that question. Many are sceptical, and a report by Europe Economics published in January seems to support that scepticism. KPMG (who is preparing the Commission’s own review) has launched a questionnaire aimed at anyone affected by the AIFMD both within, and outside, Europe. Interested parties have until the end of March to make their views known.
But meanwhile, of course, self-regulation continues, and industry-set standards have become hugely important. In the UK, the “Walker Guidelines”, affecting firms with large UK portfolio companies, are generally followed. The Private Equity Reporting Group’s annual reports highlight non-conformance to investors, the media and the wider public and the standards have been picked up as a model by the UK government. The International Private Equity Valuation (IPEV) Guidelines are widely respected and generally applied by fund managers, while diversity initiatives such as Level 20 are already making a positive difference – and have the potential to drive very significant change.
But these specific initiatives are all underpinned by commitments to integrity and fairness that are regarded as essential minimum requirements by all stakeholders. National industry associations require various assurances of integrity, and Invest Europe – the pan-European industry association – requires all members to adhere to its Code of Conduct, with a procedure for outsiders to complain about breaches. However, Invest Europe goes much further and promotes the adoption by its members of certain Professional Standards, intended to support the Code of Conduct and provide practical guidance on the behavioural expectations of member firms.
Invest Europe’s Professional Standards Handbook is a comprehensive sourcebook and covers everything from establishing and raising a fund, through the ownership and divestment of portfolio companies, to fund extensions and secondaries. It also has a section specifically for placement agents, and guidance for LPs is interspersed throughout the main text. The Investor Reporting Guidelines are integrated into the same volume and are also maintained by the Professional Standards Committee of Invest Europe.
Such a comprehensive guide must keep pace with changes in the industry, and Invest Europe is currently consulting on the latest iteration. Recent changes include a section on credit facilities (3.2.6), following some controversy over the increasing use of subscription line financing last year, and updated text on harassment and abuse of power, responding to the global challenge. The Reporting Guidelines have also been updated, and the consultation draft includes new sections specifically aimed at venture funds, funds-of-funds and infrastructure, as well as significantly enhanced reporting on the use and impact of credit facilities.
Self-regulation is very much alive and well and continues to be hugely important for the industry. A well-respected industry, with high standards of integrity and business practice, will endure for the long term and will continue to grow in stature and importance. The challenge, of course, is making sure that firms take proper account of the guidance on an ongoing basis. Engaging with this current consultation, and ensuring that in-house processes reflect the revised guidance, would be a good way to demonstrate that self-regulation still has an important place in a post-AIFMD world.
Comments on the latest draft versions of the Professional Standards Handbook (available here) and the Investor Reporting Guidelines (available here) can be made before 13 March to email@example.com. Debevoise & Plimpton is represented on the Invest Europe Professional Standards Committee.