FSA to watch private equity deals

MFI was the target of one recent private equity deal

The rising number of private equity buyouts has prompted UK watchdogs to keep a closer eye on credit markets.

The Financial Services Authority (FSA) found 13 banks had backed deals to the tune of 67.9bn euros ($86.2bn; £45.4bn), up 17% on last year.

The FSA also warned such deals might not always be prudent, and could also offer the opportunity for market abuse.

As well as closer supervision of such deals, the FSA plans to set up a centre of expertise on private equity.

In addition, the watchdog has also launched a "discussion" on the private equity market "seeking feedback from the industry and public policy makers".

The FSA's comments follow a review of the private equity market which the authority launched in March.

Buyouts surge

Private equity deals have surged in the UK. Last month, Jacobs crackers owner United Biscuits was bought out in such a deal, while in September, MFI sold its retail business to Merchant Equity Partners.

The FSA wishes to maintain the competitive position of the UK capital markets FSA report

Private equity investors use a mixture of their own money and a larger proportion of debt to take over companies that they feel are underperforming or offer big growth potential.

They usually look for a quick, profitable sale within three to seven years.

But, the FSA said they led to greater concern about market abuse and conflicts of interest.

"The involvement of participants in both public and private markets and the development of related products traded in different markets, eg credit default swaps, on leveraged loans, increases the potential for abuse," its report said.

"This lending may not, in some circumstances, be entirely prudent," the FSA said in its 102-page review, which also said loans to private equity could hurt financial stability in extreme circumstances.

'Key role'

However, while the number of private equity deals and groups had risen, the watchdog was wary of regulating the markets too tightly.

The FSA added that the sector - which raised £11.2bn through UK stock offerings in the first half of 2006 - did play a key role.

"The FSA wishes to maintain the competitive position of the UK capital markets, of which the private equity market is an important integral part," it added.

The British Venture Capital Association (BVCA) - which represents the private equity industry in the UK - welcomed the report.

But it warned that the FSA should ensure any regulation remained "appropriate".

"Crucially for the industry, the FSA has rightly understood that the more complex financing structures and involvement in the public markets are mainly concentrated in relatively few larger deals," said chief executive Peter Linthwaithe.