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Hector Sants |
On Monday the Financial Services Authority (FSA) published a discussion paper “DP06/6 - Private Equity: a discussion on risk and regulatory engagement” on the impact that the growth in the private equity market has had on the UK's wholesale markets and how the FSA intends to approach regulation in this high-profile area.
The FSA identified six main reasons which it felt it were important in reviewing the risks and potential regulation of private equity. Despite the growth in IPOs, funds raised by private equity, at £11.2B in H1 2006, still outstrips public capital raising: banks are significantly exposed to this market and are using increasingly complex instruments: the size of individual deals is growing: a secondary market is developing in private equity instruments: UK equity market capitalisation is static: and, there is an incomplete understanding of the risk in the private equity business models.
However, the FSA state that they believe that the private equity market is an increasingly important component of international capital markets and makes a key contribution to the efficiency of these markets. Through this paper, they are now seeking feedback from the industry on whether they have correctly identified the risks posed by the growth of the private equity market and the suitability of its regulatory approach in addressing these risks.
Hector Sants, FSA Wholesale Markets and Institutions Managing Director, said: "We believe private equity can significantly enhance capital market efficiency by widening the availability of capital, increasing the effectiveness of company valuations, identifying companies with growth potential and facilitating their transformation. The growing movement of capital from the public to the private equity market over the last few years poses challenges, not just for the FSA, but for all regulators charged with oversight of international capital markets. Too much regulation can be detrimental to capital market efficiency, but too little regulation can damage market confidence. So we are asking industry and policy makers to engage with us in ensuring that the UK maintains an appropriate approach to regulating the private equity industry."
The paper summarises the key risks in the market, proposes possible responses and affirms the FSA’s risk-based approach to supervision. Certain activities are already under way and the FSA is in the process of setting up an alternative investments centre of expertise which will integrate private equity firms and supervision staff into the existing hedge fund managers supervision team. Comments are requested by 6th March 2007.
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