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Earlier this year, the Department of Business, Energy and Industrial Strategy (“BEIS”) issued its White Paper which set out the UK Government’s responses to the over 150 recommendations arising from independent reviews by Sir John Kingman, the Competitions and Markets Authority and Sir Donald Brydon with the objective to strengthen the governance of companies in the UK and provide greater shareholder confidence in the public and private markets.
For the Private Equity (“PE”) market, the key recommendation that impacts large private companies is the potential extension of the UK Public Interest Entity (“PIE”) definition to include large private companies with certain defining characteristics. The response is recognising the need for improved governance on organisations that have a tremendous public impact without being listed.
The implementation of these new recommendations is still in consultation, but given the potential far-reaching nature of the recommendations, early consideration is encouraged. Entities to which these recommendations apply may be impacted from a reporting as well as operational, including internal controls, perspective.
The implication of being a PIE would likely bring with it significant resource requirement which means a cost implication as well as senior management time, all of which would impact the company’s valuation and so there are some tangible consequences of these proposals.
The government consulted on two options for extending the PIE definition:
The implication is that there could be a substantial increase in the number of entities being caught by the definition, by certain estimates up to 2,000 additional companies and so we expect that companies will be need to consider what the implications are and PE Funds need to understand the impact across their portfolios.
We expect that companies will be asking two key questions:
For PE houses, when considering the impact on their portfolio companies, the first question requires a numerical assessment of the results of the portfolio companies against the two options highlighted above. This assessment should consider both the current position of portfolio company as well as those who may trigger the definition in the future due to expected growth based on the current definitions being considered (which are subject to consultation).
The second question is slightly more complex because, in addition to the pre-existing requirements which apply for PIEs, there are a number of proposals which are being considered that PIEs would need to adopt. These include:
The changes above all require consideration as to the impact of those measures as portfolio companies will be at different stages of growth and maturity and so the impact will vary for each individual business. One of the measures that will be most impactful is the need for attestation on internal controls over financial reporting; this would require an annual review of the effectiveness of the company’s internal controls over financial reporting and related disclosures within the annual report.
Those that are familiar with US Sarbanes-Oxley (“SOX”) reporting frameworks would be familiar with these measures and would know how impactful such considerations would be on a business. Again, the impact will vary based on the maturity of the organisation and substantial time (and money) would likely be required to put those measures in place in time for the application date.
If you have any questions regarding the implications for PE, please do get in touch - contact details can be found below. Further details on the impact on private companies can be found in our paper “BEIS White Paper - The impact on Private companies”.
Yasir is a Partner in the Investment Management & Private Equity practice in London. He has over 14 years’ experience in financial services providing both advisory and assurance services, focusing on private equity clients. Yasir has also worked in New York within the Deloitte US firm where he served on a number of large fund audits. Yasir has wide experience in financial reporting in UK, US and International standards. Yasir specialises in the audit of private equity funds and corporates, including providing regulatory reviews and controls assurance engagements within the industry. Yasir is Deloitte's representative on the British Venture Capital Association (BVCA) Legal and Accounting Committee, a role which gives him great insight into the evolving landscape of technical matters in relation to Private Equity.
Ceile is a Director in Investment Management and Private Equity audit practice at Deloitte In London. She has over 10 years’ experience of leading audits and is significantly experienced in technical accounting under IFRS and UK GAAP. Ceile has a deep understanding of the complexities of the Private Equity, a proven track record of delivering high quality audits and managing risk.
Ghalib is a Senior Manager in Deloitte’s Investment Management and Private Equity audit practice. He has over 10 years of experience working firstly at EY in South Africa and then London from 2014 before joining Deloitte in 2019. His current focus is on Assurance Services including Audit as well as on working on Regulatory Change projects and Disruptive Market Events. He has served on some of the largest clients within Insurance, Investment Management and Private Equity.