SIR DAVID WALKER

11 DECEMBER 2007

  Q40  Mr Mudie: That is a very interesting answer and a very positive answer. So the impression The Financial Times have got is that you are not requiring individual firms, even if it is in twelve months, to produce this information on an individual basis, but they will be doing it to an agreed template, so we can look at any firm and we will be able to see on an agreed basis how they are operating in these three areas, whereas The Financial Times is saying, "No, no, they are not doing that. They are doing it by the BVCA. They are doing it on an industry basis"?

  Sir David Walker: The sequence will be that all the firms will give their data to an accounting firm, which is the accounting firm which has greatest expertise in this place. Immediately the industry will produce this attribution analysis for the whole industry. When there is satisfaction that the template is sufficiently objective and robust, then there is the possibility, which is a matter for Sir Mike Rake, in the light of opinion at the time, to impose these on individual firms, but there is a chronology, there is a sequence in that, Mr Mudie. I want to reassure you, there is no desire to suppress what I think is one of the most important parts of the analysis.

  Q41  Mr Mudie: Let me just press you on this because, as you accept, it is an important point. Following up your answers, your report, your recommendations, are you actually saying this must happen, or are you passing that to the new Chairman of the Compliance Committee to decide, once the template is agreed, whether it is going to be mandatory?

  Sir David Walker: I am specifying that the information to enable the attribution analysis to be done as an aggregation of individual terms firms' performance be submitted to the BVCA and the accounting firm being used for the purpose, and that will start immediately. The work will be done and it will be an industry-wide thing. At the end of a period of time, when everyone is satisfied—

  Q42  Mr Mudie: In which period of time do you envisage that?

  Sir David Walker: I would think, Mr Mudie, about a year.

  Q43  Mr Mudie: Okay; good.

  Sir David Walker: But this is a huge progress. I feel by the line of your questioning it necessary to say that no country in the world has done anything like it. There is a Private Equity Council in the United States of the same group of major firms as we have in this group in the UK. I do not think they have even thought about requiring an analysis of this kind, so what we are doing here is streets ahead.

  Q44  Mr Mudie: Keep going, Sir David. So once they have done this massive peace of work and they have an agreed template, so within two years you can say, with a year to produce it, we will be able to look at individual firms and see how these important areas have contributed to their returns?

  Sir David Walker: That possibility will be available—

  Q45  Mr Mudie: Is that not the objective?

  Sir David Walker: My objective is to get the template created and the aggregate picture clear. Frankly, I think the performance of individual firms is much less important than having this aggregate picture but when the template exists it will be available to the BVCA and Sir Mike Rake to require individual firms to produce their own attribution analysis. My submission is that will be possible; yes, probably it will be done; I think it is of secondary importance. What is of prime importance is to have it for the whole industry.

  Q46  Mr Mudie: But you see the Financial Times must be seen as an authoritative voice in financial affairs. You have started out saying they have got it wrong. Now you start to weaken and say: "Well, no, we are not doing that, but then maybe it will end up like that because to do it on an industry firm basis is not that important". Well, the starting point is it is seen as important in terms of transparency and the Financial Times says: "This is not what is going to happen; you have watered down a report, it was in the initial one, you have been leaned on and you are now retreating back to an industry-wide analysis which takes transparency away". If we said to you the transparency is important, the TUC says it is important, do you think it is very important that we get this individual transparency?

  Sir David Walker: No, I do not, Mr Mudie. No, I do not.

  Q47  Mr Mudie: So whether the Financial Times is right or wrong it does not really matter?

  Sir David Walker: The Financial Times—

  Q48  Mr Mudie: Why didn't you put it in your first report, then?

  Sir David Walker: Because I thought, and continue to think, that attribution analysis is of great importance. I have had a consultation process for four months in which I have not just received submissions—

  Q49  Mr Mudie: But you say it is important, that is the whole point, you say it is important—

  Sir David Walker: It is.

  Q50  Mr Mudie: —we have agreed ground there. Your answer to the Chairman earlier and your answer in the Financial Times interview was that well, you see if leave it to the firms they will spin it, they will be too subjective, which I think is a very good answer and very astute. So you say: Well, we will take it away and get some other body to do it, so it is done objectively, so we can all be happy with it. But then when I say is that going to happen you say it is not important it happens.

  Sir David Walker: The thought in my mind in July is that you will be able to take, say, the 16 firms, their attribution analyses, add them together, and you would have a picture for the whole industry. That will not be worth much, I am now clear, and in that respect I have changed my view since July. I have indicated why I have changed my view; it is the concern about perverse incentives, and many of those who commented to my report did not know what a perverse incentive was; most of them did not know what an attribution analysis was. My concern is to have an aggregate picture which I thought would emerge from adding the figures from the individual private equity firms. That would not be dependable. So let's start with the aggregate, get the template, and I readily agree, Mr Mudie, if it is thought to be important to have the story for individual firms, as I say, I do not feel intellectually persuaded that that is very important, but if others think it is it will be possible to require it in about a year's time when the template is robust. What I am most concerned about is that this Committee, the Financial Times, and the rest of us, do not know authoritatively how private equity performs. We have the work to which I have referred. For example, the Ernst & Young study, which is very good, is of the hundred biggest exits from private equity portfolio holdings in Europe in the two years, 2005-2006. If the story that gives private equity were the story for the whole of private equity across Europe or in the United Kingdom, it is something we need to know authoritatively about, because a lot of policy decisions or discussions, like the exchange with Mr Cousins, in my view should flow from it.

  Mr Mudie: Thank you.

  Q51  Mr Simon: Sir David, carrying on directly from George, because I thought that was a very interesting line of discussion, surely you can see that aggregation is a cloak of anonymity and is therefore the enemy and the opposite of transparency? Surely you can see that if what we do as individuals is grouped together you can no longer see what we do as individuals; that is the opposite of transparency. It is not complementary; it does not go along with it; it is the exact opposite, is it not? If you cannot see what I am doing because it is hidden amid what everybody else is doing and what we are all doing collectively, that is not transparent. That is not me being accountable for what I do; that is what I do being hidden in what everybody else does.

  Sir David Walker: The owners of private equity, of course, have a pretty good view of what you do if you are a general partner. They know how your fund is performing. When we talk to calSTERS and calPERS—

  Q52  Mr Simon: That is not what we mean about transparency. The whole point about what we mean by transparency is that we can see what they are doing. We know they know what they are doing; the whole question at issue is that nobody else can see what they are doing. To define transparency as something that they themselves know or as something that is OK as long as it is visible at aggregate level is a perverse definition of transparency.

  Sir David Walker: I disagree fundamentally—

  Q53  Mr Simon: You do or you do not disagree?

  Sir David Walker: I do. There is a spectrum, which is being very secretive and closed, which is one end of the spectrum which we all reject as unacceptable. There is the opposite end of the spectrum, which is total transparency in the sense in which you refer to it; they are rather boring—

  Q54  Mr Simon: Before you go to that, I did not create any spectrum of total transparency. I just pointed out that your definition of transparency was—

  Sir David Walker: I have not given you my definition of transparency.

  Q55  Mr Simon: Well, you have implicitly. You have defined them as being transparent to themselves, or transparent at the aggregate level, and I am saying that is not what people understand by being transparent.

  Sir David Walker: I did not talk about transparency at the aggregate level—

  Q56  Mr Simon: Yes, you did, at some length for at least 20 minutes with George five minutes ago. You repeatedly stated over and over again that aggregating attribution analysis was transparent, and you seem not to be able to see that it transparently is not transparent. It is the opposite of transparent.

  Sir David Walker: May I respond?

  Q57  Mr Simon: Carefully.

  Sir David Walker: I think I have been careful throughout this session—

  Q58  Mr Simon: I think you have been glib on occasion.

  Sir David Walker: That is a matter of opinion.

  Q59  Mr Simon: It is a matter of opinion; it is my opinion, and you respond with your opinion.

  Sir David Walker: We have a spectrum with transparency at one end and secrecy at the other. The matter for judgment relates to the degree of openness. You can have openness without full transparency; of course you cannot have full transparency without total openness. The question which is, in all these matters, where you put yourself on the spectrum is what is the purpose. Is there a justification and legitimacy for the, let's call it, enhanced openness that is being sought? I think, and here I hope you would agree, Mr Simon, there is a very powerful case for the degree of openness that is necessary to enable us to understand the economic impact of private equity, and that is my fundamental objective in all this attribution analysis exchange. It requires greater openness.