Memorandum submitted by the British Bankers'
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.
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
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
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.
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 financingbut 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
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
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
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.