FSA criticises private equity

The British Venture Capital Association has welcomed a report by UK regulator the Financial Services Authority, despite it pointing to market abuse, conflict of interest and overt leverage risks within the industry.

The UK financial regulator the Financial Services Authority has issued a stern feedback document into the buyout industry flagging up market abuse and conflicts of interest as the greatest risks posed by the industry.

“The significant flow of price sensitive information in relation to private equity transactions creates considerable potential for market abuse,” the FSA said.

The report found this is especially the case in public to private transactions and it said its latest monitoring system introduced this year would be able to address this. 

The FSA will implement reporting requirements for firms to incorporate information on committed capital in addition to the current requirement to report drawn down capital. 

Conflicts of interest are an area of significant risk in the industry, specifically to market confidence, the FSA added. Because of this conflict of interest will remain a supervisory focus of the FSA.   

In order to tackle “excessive leverage” the regulator will also conduct bi-annual surveys of banks’ exposures to leveraged buyouts starting from the first quarter of next year.

“We maintain a risk exists that leverage in individual transactions increases to excessive levels making the financial viability of the underlying firms unsustainable,” the FSA said.

This implies the default of a large private equity backed company or cluster of private equity backed companies is inevitable, it added.

On a more positive note the FSA said transparency for existing investors was more extensive than it had thought in a discussion document issued last November. It also conceded that the access of money in the retail sector was greater than it had first thought and was appropriate given the risks involved in the buyout sector.

Peter Linthwaite, chief executive of the industry body the British Venture Capital Association, said: “This has been an in-depth study of the industry which consulted widely and effectively with key stakeholders.  We welcome the fact that the regulator has concluded the industry is proportionately and appropriately regulated.”