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Bank of England looks to shine a light on private equity leverage
Global Banking & Finance Review®
Company
By Huw Jones
LONDON (Reuters) – Regulators need to shine a light on the $8 trillion global private equity sector, as opaque leverage makes it hard to get a picture of the risks it poses to financial stability, jobs and growth, a Bank of England official said on Monday.
Private equity funds, part of wider market based finance, use pools of capital, largely from institutional investors, to invest in non-publicly traded companies.
“Shining a light on the current dynamics in the private equity market is crucial at this juncture, given the important role the sector plays for the real economy,” executive director Nathanael Benjamin told a Bloomberg event.
Globally, assets under management in the private equity sector have increased to around $8 trillion in 2023, from about $2 trillion in 2013, Benjamin said.
The sector provides about 250 billion pounds ($309 billion) in funding to British businesses, especially in software communications, IT, and media sectors.
“Recent developments in that market have the potential to disrupt the supply of funding to real economy companies in a stress. And to cause systemic institutions – such as banks – to experience significant and correlated losses on their exposures linked to private equity,” Benjamin added.
The BoE is looking at the sector now because interest rates have risen, hitting highly-leveraged companies backed by PE, along with the lack of exit for PE fund investments, putting pressure on valuations sold in secondary markets.
“Some people have been stuck. And this has catalysed the development of new types of leverage,” Benjamin said.
HOMEWORK
The British Private Equity and Venture Capital Association (BVCA) said the sector generated 137 billion pounds, equivalent to 6% of economic growth, in 2023 by private-capital backed businesses.
“The private capital industry stands ready to detail how it has played a vital role in the UK economy for over 40 years, showing its resilience through different economic cycles,” BVCA Chief Executive Michael Moore said in a statement.
The BoE said last month it was taking a deeper look at risks in the sector, and Benjamin said it was now focusing on “doing its homework” before considering rule changes.
However, as with other reforms in market based finance, any action would have to be taken internationally, rather than domestically, to be effective, meaning the case for change is needed first to forge a consensus among regulators.
“It’s important to evaluate the facts in a dispassionate way before jumping to conclusions,” he said.
Any rules that could restrict inward investment by private equity would be closely scrutinised by Britain’s cash-strapped government.
($1 = 0.8093 pounds)
(Reporting by Huw Jones; Editing by Toby Chopra, Emelia Sithole-Matarise and Alexander Smith)
Private equity refers to investment funds that buy and restructure companies not listed on public exchanges, often using leverage to finance acquisitions.
Leverage in finance refers to the use of borrowed funds to increase the potential return on investment. It can amplify gains but also increases risk.
Financial stability is a condition where the financial system operates effectively, maintaining confidence and preventing systemic crises that could harm the economy.
The Bank of England is the central bank of the UK, responsible for monetary policy, issuing currency, and ensuring financial stability.
Systemic risks are potential threats to the entire financial system, which can arise from interconnectedness and vulnerabilities within financial institutions.
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