The Financial Conduct Authority and the Bank of England appear to be diverging over their stance on the risks posed by private equity firms to the wider economy.
In an interview with the FT, FCA chief executive Nikhil Rathi said he is “not convinced” that the sector, which has grown to manage $8trn in assets, presents a systemic threat.
This follows a warning from the BoE last week that lenders were not properly measuring their exposure to the sector, as well as previous concerns raised by the central bank relating to private equity’s leverage, transparency and valuations.
“What I do think is important is that the [private equity] industry does not nickel-and-dime us on data, because we need to understand the evidence here and take a view on what is happening,” Rathi told the newspaper.
“There are risks in private markets, there is work to be done, but I do not think we should go into overkill regulatory mode where we put leverage limits on all of this activity, if actually, we have not got the evidence for it,” he said. “Because I can see the case on the other side, of access to finance for businesses of all sizes.”
The FCA’s chief acknowledged the potential of ‘leverage on leverage’ in the sector, particularly as the use of NAV loans to finance cash distributions to investors grows. However, he argued more data is needed to quantify the extent of the risks.
