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The Financial Conduct Authority’s chief executive, Nikhil Rathi, has said he is “not convinced” that private equity groups pose a systemic risk, taking a stance at odds with escalating warnings from the Bank of England.
Last week, the central bank put lenders on notice that they should stress test their exposure to the $8tn industry because of risks to the wider economy.
However, in an interview with the Financial Times, Rathi said: “I am not yet convinced that we can say this is systemic.”
“What I do think is important is that the [private equity] industry doesn’t nickel-and-dime us on data,” he added, “because we need to understand the evidence here and take a view on what is happening.”
Rathi also sits on the BoE’s financial policy committee, which maps risks to the wider economy. In its most recent report, the committee escalated warnings about private equity’s leverage, transparency and valuations.
“There are risks in private markets, there is work to be done, but I don’t think we should go into overkill regulatory mode where we put leverage limits on all of this activity, if actually, we haven’t got the evidence for it,” Rathi said. “Because I can see the case on the other side, of access to finance for businesses 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 on leverage on leverage” in private equity.
However he said more data was needed to quantify the extent of the risks it poses. The BoE said last week that some banks were as yet unable to quantify their exposure to private equity.
Private equity assets have quadrupled since 2012, buoyed by a decade-long low interest rate environment. But firms have come under increasing financial pressure, with higher interest rates pushing up borrowing costs, leading to fears among some regulators that a shock in the industry could spread.
At the same time, there has been an explosion in private credit, with many buyout groups launching funds that directly compete with banks to provide financing for deals.
The FCA recently launched a review examining valuation practices for private assets, including private equity, following concerns about reliability. The government is keen for investors such as pension funds to hold more of these assets.
Rathi said private credit markets were important to UK businesses and provided financing to companies that may not have been able to access it elsewhere under the terms they wanted.
“That enables risk diversification and provides competition,” he said. “We like that. We want firms to be able to access a diverse range of sources of debt or equity capital.”
The FCA is also at the centre of a political storm after floating controversial plans to name companies that it is formally investigating. The move would put it in line with other UK agencies including the Competition and Markets Authority.
However chancellor Jeremy Hunt, in a rare rebuke to independent regulators, told the FT on Tuesday that the FCA should “relook” at the plan because “it doesn’t feel consistent” with a new post-Brexit requirement for the regulator to enhance UK competitiveness.
Additional reporting by Josephine Cumbo in London
