LONDON The business practices of U.K. private equity managers could face more government scrutiny.
Britains Financial Services Authority, which often sets precedents for the rest of Europe in financial regulatory matters, will issue a statement by the end of June detailing whether any policy changes are needed to minimize risks posed by midcap and large-cap private equity transactions. These risks, highlighted in an FSA discussion paper published in 2006, include excessive leverage, lack of transparency, a reduction in overall capital-market efficiency and evidence of market abuse such as insider trading.
Efforts to tighten regulations aimed at private equity managers in the U.K. coincide with similar pressure worldwide. In the U.S. the Senate Finance Committee is considering whether tax from buyout profits can be considered as ordinary income. In Germany, the Federal Ministry of Finance may introduce a new law that would require more transparency in private equity buyouts.
Britains House of Commons Treasury Committee announced earlier this year that it would investigate the regulatory environment, taxation and economic impact of private equity funds. A report is due in the late summer or fall.
Theres far greater influence on the (U.K.) financial services market as a whole from private equity now, so theres a greater need to determine the right level of regulatory engagement, said David Bailey, capital markets sector manager at the FSA.
Private equity managers are fighting both attacks.
The London-based British Private Equity and Venture Capital Association has appointed Sir David Walker, former chairman of Morgan Stanley International Ltd. based in London, to lead a working committee that will establish a voluntary code of compliance for private equity managers.
At least one U.K. private equity manager has made changes in an effort to pre-empt potential regulatory tightening. Earlier this year, the London-based listed private equity company 3i Group PLC released a financial report for one of its investments, HSS Service Group Ltd., Mitcham, England. That report was viewed by regulators and other asset managers as a groundbreaking move because of its financial transparency.
In May, 3i also released case studies of 15 companies in its investment portfolio as part of its annual report presentation.
Patrick Dunne, 3i group communications director, added: We have always felt that it is important to us to talk about the companies we invest in, and theres no reason why we shouldnt continue to do so as we invest in larger and larger companies.
U.K.-based private equity managers raised £34.4 billion ($68 billion) in 2006, according to data from Private Equity Intelligence Ltd., an information services provider based in London. In comparison, £29.4 billion was raised through initial public offerings on the London Stock Exchange during the same period.
The FSA, which anchors much of its policies on a principles-based, risk-focused approach, has already made a couple of changes to shore up oversight of private equity transactions, Mr. Bailey said, including centralizing its private equity division and enhancing the monitoring of credit markets.
Any disproportionate regulatory requirements could damage the competitive position of capital markets and should be avoided, according to the 2006 FSA report, Private Equity: A Discussion of Risk and Regulatory Engagement. Too much regulation could be detrimental to capital market efficiency and/or cause the private equity industry to move to more lightly regulated jurisdictions; and too little regulation could damage market confidence, the report said.
Separately the Pensions Regulator, a government agency that oversees occupational pension funds in the U.K., issued a clarification in May 2007. Although private equity managers were not specifically targeted, private equity managers who asked not to be named said the statement was aimed at a spate of recent high-profile private equity bids involving companies with substantial DB pension assets, including the private equity takeover of Alliance Boots, Nottingham, England. The £1.1 billion deal was led by Kohlberg Kravis Roberts & Co.
Amy Balchin, spokeswoman for the pensions regulator, said in an e-mail: Key elements to consider in a corporate transaction are the future cash flow support and asset availability for the pension scheme in the event of an insolvency of the employer. We wish to ensure that plan sponsors have the ability to meet ongoing funding.