PERG publishes 16th 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 2023. This year’s report covered 81 portfolio companies and 71 firms that backed them.
We have set out below the key points arising from the annual report.
- Echoing similar findings last year, an uncertain and volatile macroeconomic environment, coupled with legacy issues from Covid-19 and a high rate of inflation, had an adverse impact on many businesses both globally and in the UK. This resulted in increased narrative disclosures on financial position, business strategy and employees.
- In 2023, 96% of sampled portfolio companies complied with their Walker Guidelines disclosure requirements in their annual report. This is a slight drop from 100% compliance in 2021 and 2022 and is attributable to a single portfolio company.
- Only one company prepared its disclosures to an “excellent” standard, but this is still an increase from both 2021 and 2022, when no companies hit this mark. 60% of companies prepared “good” disclosures, the same proportion as in 2022. PERG notes that a “significant number” of companies produced excellent disclosures against individual requirements.
- 14% of portfolio companies overall did not comply with any of the three Guidelines components that apply to them (enhanced disclosures, publishing reports and providing data). This is an increase from 11% in 2022. All of these portfolio companies are backed by private equity owners who are non-BVCA members, and two were new to the population.
- Only 60% of companies sampled included an express statement in their annual report confirming that they had complied with the Walker Guidelines. This is an increase from 52% in 2022 but below the 62% achieved in 2021. Again, PERG considers this “disappointing” given that this is a “straight-forward requirement”.
- There was an increase in the number of companies that published addendums to their annual report to achieve full compliance, with the vast majority of non-compliant companies publishing an addendum on their website.
PERG views addendums as an exceptional last resort to address omissions and urges companies to avoid them by producing compliant initial disclosures. It also encourages private equity firms to engage with the BVCA earlier in the reporting process to ensure timely compliance.
- 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.
- PERG reports a decline in the standard of disclosures for non-financial KPI. In some cases, companies did not explicitly disclose their non-financial KPIs and left it up to the reader to deduce what management considers to be “key”.
- PERG noted continued non-compliance with specific disclosures, particularly social, community and human rights issues, and gender diversity information.
PERG and the BVCA are currently reviewing the Walker Guidelines to take into account changes in the broader narrative reporting landscape for both private and listed companies, as well as the increased focus on climate change and societal challenges.
The report states that a key aim of this review is to enhance further the level of disclosure by both portfolio companies and their owners.
As we mentioned last year, 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.
The non-financial reporting landscape has undergone considerable scrutiny over the past year, with disclosures becoming moulded to current perceived priorities. The previous direction of travel towards ever-increasing disclosure has been interrupted, and may even be about to enter reverse.
Earlier this year, after years of consulting and work, the Government pulled proposals to require so-called “750:750” companies to publish a resilience, audit and assurance policy, material fraud and distribution policy statements, as well as to disclose the level of distributable profits. (Read our previous Corporate Law Update on the withdrawal of reporting requirements for 750:750 entities.)
These requirements would have applied only to the very largest of PE-backed companies, but nonetheless, the Government’s about-turn indicates a recognition that heaping further regulation on companies is not necessarily the optimal way forward.
Conversely, the increased emphasis on ESG disclosures has pushed ahead. Since April 2023, larger companies have been required to report on climate-related financial risks under a regime that largely mirrors that of the Taskforce on Climate-related Financial Disclosures (TCFD). (Read our previous Corporate Law Update on large company climate-related financial risk reporting.)
And, in January this year, following its previous consultation, the Government published draft legislation to extend the UK’s regime for large company reporting on invoice payment practices. (Read our previous Corporate Law Update on the extension of the UK’s invoice payment practice reporting regime.)
To boot, in May last year, the Government launched a wide-ranging call for evidence on the UK’s non-financial reporting framework in an attempt to ensure that the framework supports economic growth and long-term value creation. (Read our previous Corporate Law Update on the Government’s call for evidence on the UK’s non-financial reporting framework.)
The review will hopefully culminate in the culling unnecessary or duplicative reporting requirements, although we should probably not expect a wholesale scaling back of narrative reporting.
The challenge for PERG and the BVCA will be to ensure that the revised Walker Guidelines keep pace with and suitably track these changes in non-financial reporting generally. Part of the aim of the Guidelines is to bring the quality and scope of disclosures by PE-backed businesses up to a level comparable to that for FTSE 250 listed companies.
But, given developments in narrative reporting over the years, particularly in relation to corporate governance and climate reporting, PE houses and their portfolio companies may well ask, with good reason, why it shouldn’t be considered sufficient to comply with statutory disclosure requirements.
We have previously questioned the continuing need for the Walker Guidelines and their practical utility in light of these increased reporting obligations. It remains unclear to what extent third parties actually pay attention to, and rely on, the disclosures made through the Guidelines.
For many investors and other stakeholders, Walker Guidelines disclosures will no doubt be useful. But, given the strategic position of the private equity and venture capital sector within the UK’s economy, it is critical to ensure that growing portfolio companies not find themselves enmeshed in reporting at the expense of time spent developing their business.