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Financial Conduct Authority chief executive Nikhil Rathi said he was “not convinced” that private equity groups pose a systemic risk, taking a stance that contradicts mounting warnings from the Bank of England.
Last week, the central bank alerted lenders to stress test their exposure to the $8 trillion industry because of risks to the broader economy.
However, in an interview with the Financial Times, Rathi said: “I’m not yet convinced that we can say this is systemic.”
“What I think is important is that [private equity] “The industry is not outdoing us with data,” he added, “because we need to understand the evidence here and get a sense of what is happening.”
Rathi also sits on the BoE’s fiscal policy committee, which highlights risks to the overall economy. In its latest report, the committee heightened its warnings about private equity leverage, transparency and valuations.
“There are risks in private markets, there is still a lot of work to be done, but I don’t think we should go into an over-regulatory mode where we limit leverage in all of these activities when we actually have no evidence of that.” said Rathi. “Because I see the other side, which is access to finance for companies of all sizes.”
Rathi – who worked at the Treasury and the London Stock Exchange before taking over as FCA boss in 2020 – acknowledged that “there is potential for leverage upon leverage” in private equity.
But he said more data was needed to quantify the extent of the risks involved. The BoE said last week that some banks were not yet able to quantify their private equity exposure.
Private equity assets have quadrupled since 2012, boosted by decades of low interest rates. But companies came under increasing financial pressure as higher interest rates drove up borrowing costs, leading to fears among some regulators that a shock could spread to the industry.
At the same time, there has been an explosion in private lending as many buyout groups have launched funds that compete directly with banks to finance deals.
Due to reliability concerns, the FCA recently launched a review examining valuation practices for private assets, including private equity. The government wants investors such as pension funds to hold more of these assets.
Rathi said private credit markets were important for UK businesses, providing finance to companies that might not have been able to access it on the terms they wanted elsewhere.
“This enables risk to be spread and ensures competition,” he said. “We like that. We want companies to be able to access a variety of sources of debt or equity capital.”
The FCA is also at the center of a political storm after controversial plans were floated to name companies it is formally investigating. The move would bring it into line with other UK authorities, including the Competition and Markets Authority.
However, in a rare rebuke to independent regulators, Chancellor Jeremy Hunt told the FT on Tuesday that the FCA should “reconsider” the plan because it was “not consistent with a new post-Brexit requirement for the regulator to improve the UK feels”. Competitiveness.
Additional reporting by Josephine Cumbo in London