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In a survey of 100 private equity (PE) fund directors and managers, 73% of respondents regarded the industry's ethical standards as high, less than a quarter (23%) believed standards to be mixed with 3% branding them as poor. The results are part of Grant Thornton Corporate Finance's quarterly private equity barometer.

While ethical conduct is deemed high by the majority of the industry, formalised codes of ethics are only in place within one in four (24%) organisations. Two thirds (66%) claimed to have an informal ethical code, while 7% admitted to having no written ethical code whatsoever.

Asked about which sector PE houses would not invest in for ethical reasons, pornography ranked as number one with 50% of PE houses refusing to invest in this market. This was followed by 48% refusing to invest in firearms/military and 28% avoiding gambling investments. Tobacco investments were sidestepped by 22% of PE houses, while a further 10% would not invest in companies dealing with alcohol.

Questioned further on the reasons that would prevent an investment in specific industries; without any prompt at all, two thirds (63%) of PE houses said they would avoid any company with exploitative labour practices, 37% would not invest in a company with no social responsibility initiatives and a third would be put off by firms with negative environmental and health effects (32% and 29% respectively). This question was to determine which ethical concerns private equity executives felt most strongly about avoiding, and was not a measure of what would be invested in. A range of other specific reasons were also cited.

Mat Bhagrath, partner at Grant Thornton Corporate Finance commented, "Given the recent media spotlight on private equity, the casual reader with little or no knowledge of the industry could be forgiven for thinking that it is lacking in ethical standards and is merely interested in profit at all cost; however, both our experience of the market and the results of this survey clearly point towards strong examples of integrity and ethical conduct."

"Clearly further improvements are needed across the industry at large, particularly in terms of formalising ethical codes of conduct. This does not mean that standards are being necessarily compromised, but a formalised code equates to a stronger code."

The recently announced review of transparency and disclosure in the private equity industry, sponsored by the British Venture Capital Association (BVCA) and led by Sir David Walker, is the first step in this process, said Bhagrath.

"The results of this survey arguably provide added purpose to the Walker review, and reinforces the need for a best practice charter that is wide reaching, robust and universally adhered to."

The PE survey also shed some light on the supposed notion that private equity houses only hold on to companies for as long as it takes to make a quick profit. The large majority of private equity firms (81%) now hold onto their investments for at least three years, while 40% retain their investments for four years or more. In asking PE executives directly whether they were "unethical asset strippers in for a quick buck", more than half (52%) said it was completely false, while a further 32% believed a handful of PE firms gave the industry a bad name. In addition, 49% attacked the left wing press for pursuing its own agenda and criticising the industry by focusing on too few examples.

Of the unprompted comments, a number of PE executives commented that industry standards were simply not communicated well.

"The clear message coming through the survey is that the PE industry believes its image in the media is unfairly represented and that its ethical standards are far higher than it is being given credit for. While it is recognised that a few isolated cases have given the industry a bad name, it is arguable that private equity and the corporate finance market at large should work towards communicating ethical policies more effectively to give confidence to investors, regulators and the general public that the industry is a force for good, generating wealth and jobs, and not aligned to recent negative connotations which have made the headlines of late," Bhagrath concluded.