Stay informed with updates on the Financial Conduct Authority’s stance on private equity risks

The Financial Conduct Authority’s chief executive, Nikhil Rathi, has taken a stance at odds with the Bank of England regarding the systemic risks posed by private equity groups. In an interview with the Financial Times, Rathi expressed his skepticism about the industry’s potential to cause a wider economic crisis, stating, “I am not yet convinced that we can say this is systemic.”

Despite escalating warnings from the Bank of England about the risks associated with private equity’s leverage, transparency, and valuations, Rathi emphasized the need for more data to quantify these risks accurately. He acknowledged the potential for “leverage on leverage on leverage” in private equity but cautioned against overregulation without sufficient evidence.

Private equity assets have quadrupled since 2012, fueled by a low-interest rate environment. However, the industry has faced financial pressure due to rising interest rates, leading to concerns among regulators about potential shocks. Additionally, the growth of private credit has intensified competition with banks for financing deals.

The FCA recently launched a review of valuation practices for private assets, including private equity, amid concerns about reliability. Rathi highlighted the importance of private credit markets in providing financing to UK businesses and enabling risk diversification.

The FCA’s controversial plans to name companies under formal investigation have sparked a political storm, with Chancellor Jeremy Hunt questioning the consistency of the move with the regulator’s mandate to enhance UK competitiveness post-Brexit.

As the debate over private equity risks continues, Rathi’s cautious approach underscores the need for a balanced regulatory response based on thorough data analysis. Stay informed with the latest updates on this developing story.