Coded warnings

The man who devised a code of conduct for private equity tells Nathalie Thomas why it will succeed.

SIR David Walker, architect of the private equity industry's code of conduct, is clearly a man who doesn't let work get in the way of friendship. Shortly after exchanging verbal blows with Jon Moulton, the outspoken boss of Alchemy Partners, in front of hundreds of people at Edinburgh's International Conference Centre on Wednesday, the pair were huddled together in a corner, chummily exchanging plans for later in the evening.

"Jon's a good friend of mine," the former Morgan Stanley chairman later confides.

Walker, who was born in the Highlands but has lived most of his life in England, was in Edinburgh last week to talk about how UK pension funds and the private equity industry can benefit one another.

He was looking forward to escaping the day's heavy pensions chat and getting back to his room at the Balmoral Hotel where he was due to have dinner with another close friend.

It was difficult to blame him. The National Association of Pension Funds conference was the second major event in as many weeks at which he found himself on the receiving end of some heavy criticism – from both within and outside the industry.

Last year Walker was charged with drawing up a code of conduct for private equity firms operating in the UK after companies such as KKR, Apax and Bridgepoint were reprimanded by MPs and trade unions for their secretive working practices and tax contributions.

The implosion of Northern Rock demoted the industry on politicians' and the media's list of priorities over the winter, but the spotlight has now returned and Walker is finding himself once again in the line of fire.

Earlier this month at the Super Returns global private equity conference in Munich, Walker's code, published last November, was denounced by his good friend Moulton as having no practical effect and representing the "new pedestrian culture of the private equity world".

Again during the seminar in Edinburgh on Wednesday, Moulton referred to it as one of the "handicaps" now hampering private equity in this country.

While they may be prepared to share a drink and a laugh in private, Walker is just as willing as his friend to engage in a public war of words.

He retaliates: "He's a good friend of mine but no, he's wrong. It will have a practical effect. Two dozen firms have said they will conform to my guidelines and I know there are more to come. In terms of describing what they do to the media, to politicians, to unions, employees, customers – private equity is becoming more open. So there is an accountability to a wider group of stakeholders than just the owners."

He stresses that several of the major firms including Kohlberg Kravis Roberts, which led the £11.1bn buyout of Alliance Boots last summer, have already started to produce the annual report-like documents he recommended, shedding light on what many still view as a highly secretive industry.

"Look at the websites: KKR, Apax, Bridgepoint, Carlyle. The websites now include a Walker compliant annual review which describes what they do, who they are, who the partners are, where they have invested, the size of their funds, how they perform. It's all there."

Sovereign wealth funds, which are expected to lead most of the major mergers and acquisitions in Europe this year, are also receptive to the code, he argues.

"Dubai said at ministerial level that had the guidelines been in place at the time of P&O (the ferry company's £3.9bn takeover by Dubai Ports World in 2006] they would have been ready to adopt the guidelines."

But it's not just Moulton taking swipes. One of the major criticisms that continues to pursue Walker is his decision to make the guidelines voluntary.

Unions and many MPs, most notably Treasury Select Committee chairman John McFall, had hoped for a compulsory reporting regime as rigid as the one governing public listed companies. With private equity firms now employing one in 10 private sector workers and owning some of Britain's most iconic companies, they argue the industry should be just as transparent and accountable as PLCs.

According to Walker, proponents of this argument are living in cloud-cuckoo-land. In his eyes, regulation for the private equity industry is out of the question.

"I continue to think there's nothing (about the code] that I'd want to change at this point. No country in the world has anything remotely like it. No country has regulation or legislation, so I'm absolutely unfazed by the criticism that it's a voluntary code. The UK has got a first. We have more private equity here than any other country in the world. We're the first country to sign a voluntary code of this kind. The industry has signed up to it and we're improving data- and evidence-based analysis. Those are big scores. All of that's very positive."

Also out of the question in his view is the union argument that private equity bosses should be forced to reveal their remuneration packages. Walker suggests that even if he had wanted to include a requirement on bosses such as Moulton and Terra Firma's Guy Hands, to make their salaries known, they would have found ways around it.

"Everyone knows they're probably likely to be paid huge amounts of money but that doesn't justify requiring it to be published in the UK. One thing that is certain is that were I to have required that they publish it, they would have all created their contracts outside of the jurisdiction (of the UK]. We wouldn't have got the information and we would have been seen to be a less friendly environment for private equity. It's prurient curiosity and a sort of envy. I kind of understand it but that didn't justify requiring the disclosure of GP compensation."

His answers may do little to drown out the heckles he continues to face about being an industry 'insider', but Walker is quick to add that there is scope for the code to evolve over the next couple of years.

The British Private Equity and Venture Capital Association has set up a monitoring group under the chairmanship of Sir Mike Rake, also chairman of BT, which will keep an eye on if and how the recommendations are adopted, and make changes where necessary.

One area where Walker suggests the unions could gain extra ground is over the inclusion of 'attribution analysis' – a requirement for individual private equity firms to explain exactly how they have generated their returns. Attribution analysis was included in Walker's original consultative document published last July but was thought to have been left out in the final draft, provoking accusations it had been watered down.

He says the idea has by no means been forgotten. The BVCA's monitoring group is currently drawing up a template for attribution analysis, which he argues, will stop private equity firms from skewing their analysis to suit their purposes.

"If we didn't have a template... then there would be a perverse incentive. Because what you'd do is show your super returns were generated by your superior management, not by leverage, not by other means. You'd try to say 'it's me, I've done it all myself' and that's a perverse incentive.

I'm not going to have my name associated with a perverse incentive."