UK - Walker loophole revealed

The final guidelines announced yesterday by Sir David Walker include a potential loophole which could allow portfolio companies to avoid the disclosure requirements stipulated in the report. The guidelines require enhanced reporting from portfolio companies acquired in a take-private for an enterprise value in excess of £300m, or in a private transaction valued above £500m. However, the report fails to address whether a company acquired for a value below these thresholds that subsequently achieves a size in excess of £300m or £500m through bolt-on acquisitions or organic growth then falls within the guidelines. A source close to the Walker Report said: 'The guidelines are designed to be flexible and to accommodate a wide range of circumstances and therefore "buy and build" companies that cross the thresholds would be expected to conform with the guidelines.’ Vince O’Brien of Montagu Private Equity, a former BVCA chairman, believes that the non-proscriptive nature of the guidelines allows questionable issues to be resolved over time. ‘I think people will adhere to the guidelines in these circumstances. It will be adopted as good practice – that is the beauty of self-regulation and it is good for the industry.’ An industry participant close to the review admitted that, ‘as the report technically states “at the time of acquisition” a company that later grows beyond this size would not have to comply. However, my own personal view is that it is a goodwill-generating exercise so firms should be in compliance. I hope no-one will view it as a loophole.’ Current BVCA chairman Wol Kolade remarked: ‘As the target company progresses, the private equity firm will be expected to play ball. We have the monitoring group which can look across the industry and ask "what about this investment". In addition to the monitoring committee there are the sector committees, which can also point out certain companies. But I doubt it will come to this. Peer pressure works extraordinarily well in an industry as small as ours.’ A note of caution regarding the value thresholds was sounded by Martin Winter of law firm Taylor Wessing. ‘It is a potential anomaly. It would not be right that a company becomes the victim of its own success and is drawn into the enhanced reporting net. If this turned out to be a problem in practice because of a large number of companies of similar size with different reporting requirements it is possible that the guidelines could be amended.'