‘Not convinced’: FCA boss downplays threat of global private equity crisis

The boss of the Financial Conduct Authority (FCA) has downplayed the threat of private equity to the stability of the financial system despite a volley of warnings from the Bank of England in recent months.

Speaking with the Financial Times, Nikhil Rathi said he was “not convinced” of private equity’s systemic risk and that City watchdogs should not go into “overkill regulatory mode” to clamp down on the sector.

The comments come despite a series of alam bells from Threadneedle Street in recent months over the potential for huge leverage in the private equity industry to send shockwaves across markets.

In a speech last week, the central bank warned there was a “creeping sense of complacency” among banks over their exposure to the sector and they were leaving themselves open to “severe, unexpected losses”.

However, Rathi said he was “not yet convinced that we can say this is systemic” in a move which put him at odds with the Bank of England.

“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 took over the FCA from now-Bank of England governor Andrew Bailey in 2020, acknowledged “there is potential for leverage on leverage on leverage” in the sector.

The comments come as private equity firms are rocked by a downturn following a decade-long investment boom fuelled by low interest rates. 

Fears have grown that banks have become over-exposed to the sector and have not prepared themselves from the effects of a drop-off in the value of private assets.

As banks have tightened their lending to the sector, private equity firms have also increasingly turned to the so-called ‘shadow banking’ sector of private credit as a means of financing deals.

Policymakers at the Bank have warned of “longstanding vulnerabilities” in the sector, which does not face the same regulation as traditional banking.

Disruption in the sector could lead to lead to “dysfunction in core markets, amplifying any tightening in credit conditions”, the Bank’s Financial Policy Committee warned in March.