Britain’s financial regulator has asked private equity firms how rising interest rates and the bond market turmoil triggered by the government’s ‘mini’ budget are affecting them and their investors, while assessing potential risks in an industry that has been declining over the past decade has increased in influence.
Officials at the Financial Conduct Authority have contacted several buyout groups following former Chancellor Kwasi Kwarteng’s mini-budget in late September, according to people familiar with the calls.
The failed financial plan triggered a meltdown in the UK government bond market, forcing some pension funds to fire their assets.
Regulators asked how badly the turmoil had hit pension funds and other investors in buyout funds, while also asking broader questions about the “impact on private markets and private markets firms,” said a person briefed on one of the calls.
The talks underscore the importance regulators place on overseeing private markets, which have become a major force in the global economy in times of low interest rates and are hit hard by higher borrowing costs due to their leverage.
Private markets include everything from leveraged buyouts to real estate, infrastructure and venture capital groups.
“Interest rates are rising and inflation is high,” and the talks centered on how private markets “are performing given these fundamentals,” said a person familiar with the calls.
They were informal discussions and not part of an investigation, the people said. One added that it is not uncommon for the regulator to contact private market groups to understand how conditions affect them.
While the brutal sell-off in UK government bonds has increased concerns about rising interest rates, a person familiar with the matter said the calls would have happened anyway as regulators try to calibrate the toll, higher inflation and rising borrowing costs are taking the buyout industry claim .
One of the calls came at the end of September, at a time when attention was fully focused on public markets as some UK pension funds rushed to sell liquid assets like stocks and bonds to meet margin calls. Another call took place the week of October 10th.
Pension funds have poured more and more money into private markets in the hunt for higher returns. But the UK crisis has highlighted the challenge investors face selling such assets quickly when major financial market turmoil forces them to raise cash.
Many private equity groups have not yet downgraded the value of their portfolio companies in line with the fall in the value of publicly traded companies this year. This has resulted in some pension funds overexposure to private markets, which represent a higher proportion of their total assets.
Managers at Harvard University’s $51 billion foundation last week warned of significant discounts in their private equity portfolio, saying they expect “significant adjustments” to the value of their private fund holdings at the end of the year as annual reviews of the funds force cuts ratings.
The FCA declined to comment.
Comments are closed.