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private equity firms fare poorly on ethics codes

November 2007

Private equity firms hold on to their investments longer than many people think, but have weak formal mechanisms for ensuring ethical codes of conduct, a new survey has suggested.

The study of private equity fund directors and managers, one of the first to look in detail at the ethics of private equity firms, found some evidence supporting claims that the industry invests for the medium or long term – contrary to trade union assertions. Eighty-one of the 100 firms surveyed said they held on to their investments for more than three years.

However, the accountancy firm Grant Thornton said that only one in four private equity firms had a formal ethical code of conduct. Two-thirds said they had an informal code, while seven admitted to having nothing.

In comparison, The Institute of Business Ethics said around 85 of the FTSE 100 and 60 per cent of the FTSE 350 have a formal code. However, it pointed out that while some private equity firms do not have codes, many of the companies they own may well do.

Mat Bhagrath, partner at Grant Thornton Corporate Finance, stressed that the absence of a formal code ‘does not mean that standards are necessarily being compromised, but a formalized code equates to a stronger code’.

He added that the findings ‘reinforce the need for a best practice charter that is wide-reaching, robust and universally adhered to’. The British Venture Capital Association has recently announced a review of transparency and disclosure in the private equity industry that may result in such a charter.

Grant Thornton found that three-quarters of respondents felt the industry’s ethical standards were high, just under a quarter believed standards to be mixed, and the rest felt they were poor. Thirteen per cent took the view that standards were inadequately communicated, and one-third claimed that a few isolated cases were giving private equity firms a bad name.




Further Information
http://www.grant-thornton.co.uk
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