Select Committee on Treasury Written Evidence


Memorandum submitted by the British Bankers' Association

INTRODUCTION

  1.  The British Bankers Association (BBA) is the leading UK banking and financial services trade association and acts on behalf of its members on domestic and international issues. Our 219 members are from 60 different countries and collectively provide the full range of banking and financial services. They operate some 130 million personal accounts, contribute £35 billion to the economy, and together make up the world's largest international banking centre.

  2.  Private equity is an increasingly significant aspect of the financial services industry. Private equity fund-raising now outstrips public capital market raising in the UK, in spite of the rise in Initial Public Offerings (IPOs) over the last year. For example, during the first half of 2006 UK-based private equity firms raised £11.2 billion of capital, as compared with £10.4 billion raised via IPOs on the London Stock Exchange.

  3.  Secondary markets have also developed in both individual investor commitments to private equity funds, and to private equity funds' holdings of entire companies. Whilst this may increase liquidity for participants in the private equity markets, it may also raise the converse risk of decreased liquidity in capital flow to the public markets.

EXECUTIVE SUMMARY

  4.  The BBA's response focuses primarily on the regulatory environment for private equity.

  5.  Private equity plays a critical role in the British economy. In the UK, there is over £135 billion committed to private equity funds. Not only do private equity funds provide essential capital to catalyse British industry, they also add essential financial, operational and other managerial expertise to business.

  6.  We believe that private equity funds are good for the market. They have provided greater liquidity to the markets and have provided investors with greater choice. In the UK, private equity is now well established as an asset category, and pension funds are now typically investing around 3% in private equity funds. Some 70% of public to private transactions in the UK over the prior year (by value) were funded by private equity firms.

  7.  It is our view is that the current regime is suitable. The FSA has recently reviewed private equity and has adopted a similar approach to its role in regulating managers of hedge funds. This focuses on collecting information from private equity fund managers and deciding which funds may have the biggest impact on markets or investors. These fund managers are then monitored as part of a specialist "alternative investments" supervision team at the FSA.

  8.  We consider this to be a proportionate approach. We note that in its May 2007 meeting ECOFIN endorsed this as the right approach for supervising hedge funds. We believe that ECOFIN's conclusions are equally valid for private equity funds.

  9.  There may be scope for enhanced transparency in this area. Some work is already being undertaken in this area by the BVCA under a group led by Sir David Walker. We consider that an industry led approach is the correct initial response with regard to issues about transparency and would wish to await the recommendations of this group.

REGULATORY ENVIRONMENT

  10.  Our members have not observed any additional risks pertaining to the private equity market other than those identified by the FSA in their recent Discussion Paper on the issue (DP06/06, published in November 2006). This Paper did find some evidence of increased leverage but considered that there were no systematic implications.

  11.  The fundamental issue with regard to the risk of default of a corporate whether acquired by a private equity fund or otherwise is not how frequently it is traded but what its underlying financial position is. This, more than the way in which particular securities of the firm are held or traded, is the primary consideration. An aspect of this can be the amount of leverage used in any corporate financing—but the mere fact that there is high leverage might not necessarily mean there is a high risk of default.

  12.  The way in which securities are held can, however, be an important secondary consideration. Traditionally many corporates borrowed from a small number of lenders to finance themselves. Nowadays, it is increasingly common for a corporate to use a wider range of financial instruments including a range of debt instruments.

  13.  This tends to mean that holdings are more widely diversified leading to a much wider and more diversified group of creditors. On the whole, this means that risks to the broader financial system are lower because they are spread more widely.

  14.  We do not believe that there are further specific areas of conflict of interest to be considered. But further thematic work could be considered in relation to the Market Access issue, if participation from retail investors ever starts, as the current market structure would not be suitable for less sophisticated investors.

  15.  There is clearly a balance to be made between excessive regulatory requirements, which would raise the risk of the industry simply moving out of the UK, with a concomitant loss to both investors and corporates, and the converse risk of insufficient regulation giving rise to the risk of loss of market confidence.

16.  TAXATION

  17.  Our members believe that the existing fiscal regime regarding private equity is appropriate.

  18.  There are no specific tax concessions with regards to private equity, and hence there exists a level playing field with regard to private equity and other areas of the financial services industry.

May 2007





 
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