Private equity risk under FSA spotlight

There is clear unease at the FSA over recent expansion of the private equity market. In its DP06/6, the regulator notes that UK-based private equity fund managers raised £11.2 billion of capital, against £10.4 billion of initial public offerings on the London Stock Exchange, in the first half of 2006. It also highlights an aggregate 17% growth in 13 banks’ exposure to leveraged buyouts, from €58 billion to €67.9 billion, between June 2005 and June 2006 and observes that “system-wide exposures” are even greater due to banks’ increasing distribution of debt to CLO (collateralized loan obligation) and CDO (collateralized debt obligation) managers and hedge funds. It believes that the best way to address the question “what is the appropriate level and form of regulatory engagement with the private equity sector?” is to look at the risks that are posed to its statutory objectives.