Wonga controversy highlights need for stronger reporting

Alice Murray
29 July 2013

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Whatever the recent Wonga embarrassment says about how the Church of England manages its investments, for the private equity industry it shines a bright spotlight on insufficient reporting throughout the multiple layers from LP through to portfolio company. Alice Murray reports

Last week a media furore erupted over the embarrassing revelation that the Church of England's pension fund had indirectly invested £75,000 in payday lender Wonga after the Archbishop of Canterbury threatened to force the business out of the market. Archbishop Welby is now tasked with finding out how the Church of England was supporting the business without knowing.

The revelation forces industry practitioners to ask who is responsible for reporting at each level. How informed are LPs when it comes to an individual fund's investment activity, when new deals are signed, if a company is bolted on, if a non-core division is divested, when management changes, financial figures and growth, debt levels and crucially the geographies and markets that each investment exposes the investor to?

Beyond issues surrounding the many layers between portfolio company and LP, the Church of England case adds a sticky coating of ethics. When it comes to ethical investing there are some clear-cut dos and don'ts. The Ethical Investment Advisory Group (EIAG), which advises Church of England investments, restricts investment in tobacco companies, businesses involved in military services or products, pornography and extortionate interest-rate lenders.

However, Archbishop Welby raised a valid point when defending the Church of England following the embarrassing revelation: in the real world, companies are exposed to a plethora of varied markets and there is always the possibility of one investment touching an area deemed unethical by a particular investor. Today's businesses have been forced to seek custom in whatever shape or form it comes in, and as Archbishop Welby pointed out, that could be a clothing company supplying socks to the army, or a hotel that offers pornographic content in its guest rooms.

Ethics is more than just a grey area when it comes to investment. Trying to quantify it or put borders and labels around it is futile – ethics are wholly personal. What the Church of England is unhappy to invest in can only be determined by the Church of England. The argument here is not whether Wonga is morally good or bad.

As the asset class has grown and evolved, it is now responsible across the globe for LP cash in the billions – pension funds belonging to tens of thousands of different types of workers and sets of people. If the Archbishop was not aware of the investment in Wonga through its commitment to Accel Partners, then how far do the lines of communication need to be extended?

Today, technology, and specifically software-as-a-service (SaaS) is developing at a rapid pace. One of the most prevalent hubs for these advances is in London's Tech City. Funds including Accel pour millions into innovative, transformative, primarily communication-focused early-stage companies; young businesses that are smartly addressing the difficulties of complex communication. How, then, is one of the most sophisticated investment classes – near to bursting with the world's brightest and most enterprising people – failing to offer its funders, its life blood, the transparency and high standards of reporting that they so rightfully deserve?

In a constantly changing world, the realities of globalisation and ever-growing chains of command are subject at every level to error, oversight and even corruption.

If the industry doesn't act now, the regulators will - bringing with them uncertainty, scrutiny and more locust, ambulance-chasing, masters-of-the-universe, vampire-squid vilification. This in turn only serves to spook investors as well as potential new management teams and investment opportunities. The industry is choking off its power source at both ends.

Fortunately, pockets of the industry are waking up to the potential damage of poor transparency and disclosure and steps are slowly being taken to address this life-threatening problem.

Beyond the resource-intensive reporting guidelines set out by Institutional Limited Partners Association (ILPA) and the International Private Equity and Venture Capital Valuation (IPEV), sophisticated technology focused on efficiency improvements is making its way in. High-profile firms such as KKR, alongside software developers including eFront, are developing solutions to open up the flow of information from portfolio company through to LP.

Other initiatives, such as the recently created organisation AltExchange Alliance, could be seen as further tools to bring the asset class into the modern world and deliver the communication solutions so desperately needed to keep the industry relevant and alive.

Click here to read a report on these new developments in private equity data management and reporting.