Hands leads the way

Unless more responses to Sir David Walker's UK transparency review imitate Terra Firma's informative report, the process risks resembling a PR exercise.

Guy Hands' Terra Firma Capital Partners went far beyond the minimum requirement for disclosure in its first Walker-compliant annual review of its activities, setting a high bar for private equity houses in Europe and elsewhere. Under the much-vaunted transparency initiative drawn up by the ex-Morgan Stanley chairman, Terra Firma was only required to submit information on three of its portfolio companies: EMI, the UK music business, Odeon/UCI, the cinema chain, and Annington, a property company.

But Terra Firma chose to go beyond the criteria of the Walker report, revealing extensive financial details, showing it paid £15.2 million in corporation tax, income tax and national insurance to the UK Treasury on income of £46 million and profits of £3 million. More than £200 million of interest was paid by Terra Firma's UK businesses to UK banks in the year, and they paid £78 million to advisors based in the UK. It also provides extensive details of the profits of all its underlying portfolio companies.

Terra Firma even revealed that it paid its senior management of 15 an average of £665,053 or a total of £8,978,216 in salaries and bonuses in 2007. The disclosure is remarkable, since Walker has said staff remuneration need only be shared with LPs, and should not be included in public reports.

?The simple truth is we have nothing to hide. Private equity should not be clouded in secrecy, but explained,? Hands said. ?This role as a catalyst for change is private equity's most useful economic and social function. We believe that only when firms become open and transparent will people appreciate this.?

This approach stands in contrast to that of other European buyout firms such as Permira, Doughty Hanson, Bridgepoint and Montagu Private Equity, who have compiled their own reports, but far more demurely. To be fair, of the reports published so far, besides Terra Firma, only Permira has any companies that fall under the Walker guidelines. Going into detail is also a long and bothersome process: Terra Firma's report cost approximately €325,000 and took around 2,000 hours. The cost in time and money underlines why smaller firms were keen to stay outside the scope of Walker's report and why other firms will be frustrated to see Hands widen Terra Firma's reporting to include its entire portfolio and provide more details than necessary.

The fault for the lack of detail may lie in the Walker prescriptions. The guidelines drawn up by Walker limited the reach of its voluntary transparency code to companies with 50 percent of their revenues in the UK and 1000 UK employees. Companies bought in non-public to private bids with an enterprise value of more than £500 million will be expected to comply; while companies bought in take-private bids should have a market capitalisation of £300 million.

According to exclusive research published by sister website PrivateEquityOnline, this means of the 25 firms already signed up by industry body the British Private Equity and Venture Capital Association to comply with the Walker report, only 32 portfolio companies would be expected to comply.

But Permira, despite its decision to reveal less than Terra Firma, indirectly provides very detailed disclosures about its portfolio companies in the reports issued by SVG Capital, the listed largest investor in its funds. It will also report on a ?comply or explain? for the three portfolio companies that fall under the report's criteria: Gala Coral, the gambling company; AA-Saga, the motoring and travel insurance group; and New Look, the fashion retailer. The results of these reports have not yet been released.

As a side note, the limited disclosure of Permira's report could still be revealing. Although the world may not learn what Spanish pizza company Telepizza makes in profits, the report does reveal that approximately 500,000 Spaniards eat a pizza in one of its more than 600 branches every Saturday. One also learns that the firm has invested €9.2 billion since 2000 and realised €9 billion, while its current companies have an approximate aggregate enterprise value of €70 billion.

It will be interesting to see whether other firms choose to break cover like Hands and provide detailed disclosure across the board. More important macroeconomic developments have made buyout firms appear less powerful than 12 months ago, so the political heat on the industry remains far lower than last year. But the demand for greater transparency has forced a tentative step towards communicating with the outside world in public documents.