The Guidelines Monitoring Group (the “Group”) was created in 2007 as an independent body to monitor the private equity industry’s compliance with Sir David Walker’s Guidelines for Disclosure and Transparency in Private Equity (the “Guidelines”). Since then, the industry has embraced and adopted these Guidelines with over eighty portfolio companies currently providing additional disclosure voluntarily.

Last summer we outlined our plan for promoting and developing the Guidelines in light of changing narrative reporting requirements in the UK and European regulatory developments. The Department of Business, Innovation and Skills’ has since implemented regulations that will change the way all companies (including private companies) report by requiring information of strategic importance to be promoted to a separate strategic report that sits alongside the directors’ report. The strategic report will also require approval from the board of directors thereby emphasising its positioning in a company’s narrative reporting.

The Group is consulting on the changes the implementation of The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (the “Strategic Report Regulations”) will necessitate to the Guidelines. This need has arisen as the Strategic Report Regulations remove the requirement for a business review in the directors’ report – which was the foundation for the enhanced disclosure requirements for portfolio companies covered by the Guidelines – and moves this content to the strategic report. In addition, further information is required on the business model, gender diversity and human rights matters from quoted companies and as the intent of the Guidelines is to mirror the reporting by quoted companies, the Group believes these additions ought to be included. Companies must also set out their strategy clearly; this however is already expected by the Group when implementing the current Guidelines. Section 2 outlines: the changes proposed; the timeframe for implementation (which includes a year’s grace monitoring compliance by quoted companies) and questions we would like interested parties to consider as part of this consultation process.

The Strategic Report Regulations also require information on greenhouse gas emissions to be included in the directors’ report for quoted companies. The Group has concluded that this information does not need to be incorporated in the Guidelines as the amendments should focus on the elements previously contained in the business review. The Group will continue to monitor the implementation of the recommendations arising from the Sharman Panel of Inquiry into going concern and liquidity risks, and assess if amendments are needed in the coming years.

The Group has been monitoring the development of the Alternative Investment Fund Managers Directive (“AIFMD”) and is of the view the Guidelines do not require any changes to incorporate the transparency requirements included in the AIFMD. Therefore, private equity firms and portfolio companies that are covered by the Guidelines are not expected to provide disclosure on any of the applicable additional requirements in the AIFMD if they do not fall within the scope of the AIFMD. Firms that are covered by the AIFMD may find the Guidelines and examples of good practice reporting by portfolio companies as a useful source of guidance but are responsible for taking appropriate advice to ensure they are fully compliant with their obligations. Section 3 explains in more detail how the Guidelines and the AIFMD interact with respect to the disclosures required in annual reports and those required on acquisition of non-listed portfolio companies.

Part V of the Guidelines sets out Sir David Walker’s final guidance on the enhanced disclosure obligations placed upon portfolio companies and private equity firms. As there have been a number of changes since 2008, appendix 2 sets out the full text including the current proposed amendments and the amendments that have been implemented since the Guidelines were first issued. As part of this review process, the Group has opted not to reduce the size thresholds that determine whether portfolio companies are within scope.

The Group’s central aim is to improve the quality of narrative reporting in line with good practice seen amongst constituents of the FTSE 350, our chosen benchmark. This aim underlies the decisions made on which amendments to take forward when revising the Guidelines. We have also considered whether to include a specific statement of conformity with the Guidelines in the annual report of the portfolio company and we believe this proposal should be taken forward as it will contribute to higher standards of transparency in reporting. This is in line with statements expected by directors of listed companies complying with the UK Corporate Governance Code including the new requirement to confirm they consider the annual report to be “fair, balanced and understandable.” The Group expects that this, coupled with the implementation of the Strategic Report Regulations, will further enhance the overall quality and content of annual reports across the FTSE 350.

The Group, along with PwC, will publish an update to the Good Practice Guide this summer to help firms understand what is expected to comply with the amended Guidelines. Some of these requirements are also new for quoted companies and so it will take time to establish common practice and benchmarks for comparison. Over time, the Group expects disclosures to become more relevant and focused setting out what is important to shareholders and stakeholders in the company. There is growing emphasis on the need to better link different elements of the annual report to highlight important relationships and interdependencies and ensure the overall report has a forward looking orientation. Portfolio companies and private equity firms will need to bear this in mind when finalising their disclosures, particularly against the backdrop of improving standards in the FTSE 350.