The boss of the Financial Conduct Authority has told private equity firms to hand over more information or face a regulatory clampdown today in the latest sign that watchdogs are tightening their scrutiny of the sector’s threat to financial stability.
Speaking at the Association of Corporate Treasurers, FCA chief Nikhil Rathi said private firms’ valuations have been “under pressure” over the past year and buyout houses now needed to work with the regulator or face firmer action.
“I have made clear that the answer isn’t to reach automatically for the regulatory cudgel. And I would like to see more evidence before we declare we have a systemic issue in the private finance sector,” Rathi said.
“What we need is better information so we can properly appraise the risks. We should not unjustifiably restrict an important source of financing to businesses of all types.”
Rathi added that he had “cautioned the private equity industry that they need to proactively help us get the information we need.”
The comments signal growing unease over the stability of the $8tn industry and its threat to the global banking sector, which lent heavily to fund private equity firms’ dealmaking over the past decade.
The cost of servicing that debt has increased rapidly as central banks have hiked interest rates to cool inflation. A global downturn has also caused the value of the underlying assets to plummet, choking off investors’ ability to generate cash.
However, Rathi stopped short of describing the issue as a “systemic risk”, drawing a dividing line with the approach of Threadneedle Street which has warned a sudden collapse in valuations could threaten the stability of the financial system.
Rebecca Jackson, a senior executive at the Bank, said in a speech last month that there was a “creeping sense of complacency” among banks, which had little ability to compile data on their lending to the industry “or even appreciate its crucial importance”.
The “bankruptcy of multiple portfolio companies” was “leaving banks open to severe, unexpected losses” and could pose a “systemic risk,” she warned.
The Bank of England has ordered banks to begin stress testing their exposure to private equity amid fears that lenders are essentially flying blind on the risks it posed. Rathi added the FCA has been supporting the Bank of England in its work to probe the exposure of banks to the sector.