BoE Warns of PE Financial Stability Pitfalls
(28 March 2024 – United Kingdom) The Bank of England (BoE) has cautioned that excessive private equity (PE) funding could trigger a financial crisis as it launches a review of the £6.3 trillion sector.
Regulators have raised concerns about the value of assets controlled by PE entities such as businesses and commercial real estate (CRE). Greater transparency is required given the lack of understanding of how much capital is leveraged against them, raising the risk of a dangerous contagion in financial markets should a sudden market sell-off or revaluation take place.
“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” stated PE trade body BVCA CEO, Michael Moore.
“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. We caution against viewing the industry’s use of debt as dangerous.”
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