Reporting issues in private equity and venture capital

There are more than 5,000 private equity and venture capital-backed companies in the UK and about 90% of that capital is in SMEs. Gurpreet Manku looks at the key legal and reporting issues facing the sector, including the National Security and Investment Act, public interest entities and fund structures

UK private equity (PE) and venture capital (VC) have the track record and the available capital to play a crucial role in helping the UK economy continue to make a growth-led recovery from the COVID-19 crisis. Developing the UK’s positioning as a leading investment and asset management hub, investing sustainably so the country can meet its net-zero commitments, and addressing disparities in economic and social opportunities, are all high on the British Private Equity & Venture Capital Association’s (BVCA) agenda.

We are continuing to work with the government and regulatory stakeholders as they shape the post-Brexit legal, tax and regulatory environment to ensure it continues to encourage private equity and VC investment in a range of UK businesses, across sectors and geographies. This funding for PE/VC-backed portfolio companies to grow and innovate will be an important building block for the UK economy.

National Security and Investment Act

ICAEW has, of course, made representations on behalf of the Corporate Finance Faculty’s members, ahead of the National Security and Investment (NSI) Act being passed into law, as readers of Corporate Financier will be fully aware. The BVCA, too, responded to those consultations and engaged with government and officials as the bill passed through Parliament. We support, in principle, the measures to protect the UK’s national security interests. If calibrated correctly, the new rules should be helpful in ensuring the UK remains an attractive location for investment and conducting business. However, the new regime must strike a balance between protection of genuine areas of critical national security interest, and raising unnecessary hurdles for foreign investment in UK infrastructure and businesses.

The start date for the Act is 4 January 2022 and the BVCA has been a member of the Department for Business, Energy and Industrial Strategy (BEIS) expert panel tasked with reviewing the implementation of the new regime and related guidance. Several concerns regarding how the NSI Act will affect private equity and VC transactions remain, and we will only get full visibility once it comes fully into effect and has been in operation for a period of time. We expect there will be a number of transactions that could, potentially, have to be notified. There will definitely be a lot more than were originally envisaged and, thankfully, I think the government understands this and has said the new Investment Security Unit will be fully resourced by next January and all guidance published. David Petrie at the Corporate Finance Faculty played a vital role in ensuring BEIS publish comprehensive guidance notes and that the ISU adopt a culture of responsiveness to market participants.

Private equity firms are used to having to factor in regulatory approvals from competition authorities, but this is a new process with a wider reach. It is likely to have a different impact on deal timelines, depending on the type and size of transaction. Lengthy timeframes for regulatory approvals will affect all deals, but on the venture side funding can often be critical for start-ups.

We have recently provided feedback on the statement setting out how the Secretary of State’s call-in power will be used, and highlighted where additional clarity and guidance could be beneficial. This includes looking to other international regimes that provide factors for transacting parties to consider, and updating the guidance more regularly to incorporate lessons learned during the regime’s early years.

There have been helpful updates to the definitions of the 17 sectors that will require mandatory notification and we encourage firms to continue to provide us, and the ICAEW, with feedback on their experience of the notification process. We do understand that the government doesn’t want the regime to adversely affect investment, but for now it is retaining flexibility to ensure it can fully assess threats to national security.

The National Cyber Security Centre and the Centre for the Protection of National Infrastructure have also launched the Secure Innovation package of guidance as a joint campaign to support investors and CEOs in emerging technology. The guidance aims to highlight the risks that start-ups and growing companies in the innovative and emerging technology space can encounter and provides practical steps to take to protect IP and maximise success.

Public interest entities

The BEIS consultation, Restoring Trust in Audit and Corporate Governance, sets out the government’s proposals to implement most recommendations of the Kingman, Brydon and Competition and Markets Authority reports into the audit profession, the role of the regulator and corporate reporting and audit. This includes extending the definition of public interest entities (PIEs) to include large private companies. The impact of this change includes additional reporting requirements (such as on internal controls) and restrictions on the non-audit services PIEs can procure from their auditors.

There is likely to be a phased implementation over the next few years as the proposals are finalised. The definition of a large private company in this context is yet to be confirmed, but could include those companies subject to the Wates Principles of corporate governance reporting.

ICAEW’s own formal representations have commented on the potential to impact smaller deals and smaller private equity firms operating in the lower mid-market. The cost of implementing these changes will be high and needs to be borne in mind when considering the attractiveness of the UK.

We’ve recently seen more mandatory reporting requirements apply to large private companies, including on corporate governance, energy and carbon reporting, engagement with employees and how directors have complied with their duty under s172 of the Companies Act (note the thresholds for these different requirements vary). The expansion of the definition of PIEs to include the largest UK private companies will continue this trend.

Fund structures

Maintaining the attractiveness of the UK as a jurisdiction for fund managers and as a domicile for funds remains a priority. Currently, there is much ongoing work on creating a better framework for UK asset-holding companies (below the fund structure) as an alternative to Luxembourg. The government will also publish its response to the broader review of the UK’s funds regime later this year.

Creating value

Private equity and venture capital firms invest across the UK, with the majority of businesses being SMEs. The industry also contributes to the role of the UK as a globally significant financial services centre. That is in no small part founded on the ease of doing business in the UK, and the country’s regulatory, legal and tax frameworks, which set and maintain world-class standards.

The competitiveness of the UK’s investment environment is not unchallenged. Other jurisdictions in Europe and elsewhere have been making inroads in recent years, and the government is starting to respond with positive initiatives such as the review of the asset-holding company and funds regime.

Alongside the wider business environment in the UK, the government believes that the changes coming into effect in the next few years will support the continued attractiveness of the UK as an investment and employment location. Private equity and VC will definitely contribute to creating this public value and the industry will have an important role in shaping the legislative framework that supports this.

About the author

Gurpreet Manku, deputy director general and director of policy, BVCA, and fellow of ICAEW

 

About the article

This article originates from the Corporate Financier October 2021 edition. The magazine is exclusively available to ICAEW Corporate Finance Faculty members.