The Financial Services Authority is to assess the risks posed by private equity firms investing in the UK financial sector.
As a result of a study on private equity investments published last week, the regulator has warned that market abuse and conflicts of interest are the main fears associated with private equity investment.
The FSA’s stance on market abuse follows criticisms that there are often marked increases in the share prices of target firms before private equity firms announce takeover plans.
The regulator will also assess the way banks advise private equity firms before lending to them and investigate the high levels of borrowing that some private equity firms build up to fund takeovers.
To strengthen its oversight of the private equity market, the FSA will improve its data collection by conducting regular surveys into banks’ exposure to leveraged buyouts.
Michael Clapper, chief executive of Enterprise Group, says he had no concerns when Promethean Investments, a private equity firm, bought a 30% stake in his company earlier this year.
Clapper says: “We were comfortable with the arrangement as Promethean had no previous ties with the industry. But I can see how a private equity len-der buying into a distributor could result in bias when it comes to choosing products. This is something the FSA should look into.”
Hector Sants, managing director of wholesale business at the FSA, says the regulator’s approach to private equity deals is “broadly appropriate” but is in need of refinement.