Bank of England to probe private equity industry

The Bank of England is to review the $8 trillion (£6.3 trillion) private equity industry amidst concerns that heavy borrowing by private equity backed businesses could pose a risk to financial stability.

The minutes of the March quarterly meeting of the Financial Policy Committee said: “The private equity sector, which is closely related to private credit and leveraged lending, plays an important role in channelling finance to the UK real economy.

“Finance for riskier corporates could be particularly vulnerable to a significant deterioration in investor risk sentiment.

“More recently, higher interest rates have made it more difficult for private equity funds to raise investment, contributing to downward pressure on asset valuations and default rates on debt linked to private equity have increased.”

The summary goes on say that the “private” nature of private equity means transparency around asset valuations, overall levels of leverage, and the complexity and interconnectedness of the sector make assessing financial stability risks difficult and mean that risks need to be managed carefully, both by those in the sector and by their counterparties.

The Bank’s policy committee will publish a further assessment of these risks in its June 2024 Financial Stability Report.

After a period of low interest rates, leveraged private equity deals ballooned, with businesses such as Asda and Morrisons being acquired by private equity funds who borrowed heavily to bring their economic model to cash generative businesses.

BVCA chief executive Michael Moore with Andy Burnham

However, Michael Moore, chief executive of the trade body British Venture Capital Association (BVCA), who has been leading a high profile charm offensive with politicians and policy makers came out with a robust defence of the sector, saying: “The private equity model of active ownership focuses on delivering long-term growth.

“Where leverage is used, it is part of a capital structure appropriate to the business using it. Lenders are sophisticated commercial parties and are incentivised to ensure that the arrangements promote the company’s growth prospects.

“As we saw during the global financial crisis, the PE model is tried and tested. Private capital has been an important part of the UK economy for over 40 years, showing its resilience through different economic cycles.”

At’s Rainmakers conference last week, Garry Wilson, chair of the BVCA and managing partner of Endless, was also upbeat about the potential of the sector.

He said: “There has never been a better time for entrepreneurs to get the backing they need. There has never been a better time for family firms to address succession issues with the introduction of new capital – our capital.

“There has never been a better time for management teams to get the backing and support that they need – and indeed there has never been a better time for successful business owners to reap the rewards.

“The even better news is that we remain a young industry with huge room for growth.”

Click here to sign up to receive our new South West business news...