PERG publishes annual report on Walker Guidelines compliance

The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. They require portfolio companies to make certain disclosures in their annual report, publish their report and a mid-year update in a timely manner, and share certain data to gauge the contribution of UK private equity to the economy.

They also require private equity firms to make certain website disclosures.

The report assesses compliance with the Walker Guidelines during 2022. This year’s report covered 73 portfolio companies and 64 firms that backed them.

We have set out below the key points arising from the annual report.

Alongside PERG’s annual report, EY has also published its own annual report on the performance of portfolio companies across a number of metrics in 2022, which also makes for interesting reading.

Political and macroeconomic events

• The combination of the conflict in Ukraine, Covid-19, Brexit and the associated rise in inflation and cost of living has had an adverse impact on many businesses both globally and in the UK. This resulted in increased narrative disclosures on liquidity, loan covenants and forecasting.
• Although the Covid-19 pandemic is still affecting some sectors of the economy, there has been a broader “shift back” to “normal” reporting timelines.

Overall compliance

• For the second year running, all portfolio companies reviewed in the sample complied with their Walker Guidelines disclosure requirements in the annual report.
• However, also for the second year running, no portfolio company produced “excellent” disclosures overall, and the proportion of companies producing “good” disclosures dropped from 67% in 2021 to 60% in 2022. PERG attributes this to a larger sample set in 2022 which included companies reviewed for the first time.
• Only 52% of companies sampled included an express statement in their annual report confirming that they had complied with the Walker Guidelines. This is a drop from 62% in 2021. Again, PERG considers this “disappointing” given that this is a “straight-forward requirement”.

PERG notes that the quality of reporting by listed companies (the benchmark by which it measures portfolio companies’ disclosure) continues to improve. It cautions portfolio companies against producing the same disclosures year-on-year, as a disclosure considered of good quality three years ago may now be considered only “basic”.

The review encourages PE firms to spend further time with their portfolio companies to ensure knowledge of the Walker Guidelines requirements is embedded in their annual reporting cycle and to continuously improve the quality of disclosures.

Non-financial key performance indicators

• There was no notable increase in the quality of disclosure of non-financial key performance indicators. Many companies identified only one or two KPIs and failed to explain why they are strategic priorities. This is perhaps surprising after last year’s report, in which urged improvements on non-financial KPIs.
• The most useful disclosures of non-financial KPIs involved linkage to key strategic priorities and were presented alongside financial KPIs.
• However, PERG did see improvements in the quality of disclosures on environmental matters (in part driven by compliance with the streamlined energy and carbon reporting (SECR) regime), business model and gender diversity, all areas which PERG had flagged in 2021.
• There is a need for improvement in the quality of disclosures on financial position and employees. Employee disclosures often included only the statutory information required in the annual report. PERG is asking for more information on strategy, targets and plans.
• Disclosures on social, community and human rights were basic and will be a key area of focus for PERG in 2023.

Given the increased focus on environmental, social and governance (ESG) matters, it is not surprising to see an improvement in the quality of ESG disclosures. We have seen continued increased investor-driven demand for ESG outcomes, as we previously noted in the third article in our in-depth series on ESG in private equity.

However, portfolio companies and their backing firms should not become complacent. The pace of increasing ESG disclosure in the listed company community continues to quicken, and we are seeing a marked increase in the use of ESG-linked KPIs.

As we noted in the first article in our in-depth series on ESG in private equity, PE houses should consider requiring portfolio companies to make disclosures on a range of ESG factors as part of their annual reports, including non-financial KPIs.

Next steps

PERG will now send “feedback letters” to portfolio companies and PE firms explaining where improvements can be made. Sponsors and investee companies should study these letters to understand where they can improve in advance of PERG’s 2023 review.

PERG and the British Private Equity and Venture Capital Association (BVCA) will continue work on updating the Walker Guidelines to accommodate changes to the narrative reporting landscape and to reflect increased stakeholder interest in the PE industry following high-profile transactions involving well-known UK businesses.

A review is undoubtedly overdue. The Guidelines for portfolio companies were last updated in July 2014. The disclosure requirements for PE houses were last updated in 2007.

Much has changed in the last decade and even more since the Guidelines were introduced in 2007. The scope of non-financial reporting for UK companies – predominantly listed but also private – has expanded massively to encompass more comprehensive disclosure requirements in relation to energy usage, greenhouse gas emissions, climate-related financial disclosures, net zero transition, corporate governance frameworks, gender pay gap, gender and ethnic diversity, modern slavery, tax strategy, and invoice payment practice and performance.

These will all be areas of focus for PERG and the BVCA when refreshing the Guidelines. PE houses and portfolio companies would be well advised to start thinking now about how they can improve reporting in these areas.

The flipside to this, however, is the question whether the Walker Guidelines remain necessary and of use in light of the increased reporting obligations on companies and PE houses from other sources. It is not clear from PERG’s report to what extent third parties actually pay attention to, and rely on, the disclosures made by companies and PE houses as a result of the Walker Guidelines.