FCA asks private equity about knock-on effects of market turmoil

Britain’s financial regulator has been asking private equity firms how rising rates and the bond market turmoil unleashed by the government’s “mini” Budget are affecting them and their investors, as it assesses potential risks in an industry that has ballooned in influence over the past decade.

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 briefed on the calls.

The failed fiscal plan triggered a meltdown in the UK government bond market that forced some pension funds into fire sales of their assets.

Regulators asked how badly the turmoil had hit pension funds and other investors in buyout funds while also raising broader questions about the “impact on private markets and private markets firms”, a person briefed on one of the calls said.

The conversations underscore the importance that regulators are placing on oversight of private markets, which have become a major force in the global economy during the era of low interest rates and stand to be hit hard by higher borrowing costs because of their use of leverage.

Private markets span everything from leveraged buyouts to real estate, infrastructure and venture capital groups.

“Interest rates are rising and inflation is high” and the conversations were about how private markets are “operating in light of these fundamentals”, a person familiar with the calls said.

They were informal talks and are not part of any investigation, the people said. One added that it was not unusual for the regulator to contact private markets groups to understand how conditions are affecting them.

While the brutal sell-off in UK government debt has sharpened concerns over rising interest rates, one 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 on the buyout industry.

One of the calls took place at the end of September at a time when attention was squarely focused on public markets as some UK pension funds raced to sell off liquid assets such as stocks and bonds to meet margin calls. Another of the calls took place in the week of October 10.

Pension funds have ploughed ever more money into private markets in the hunt for higher returns. But the crisis in the UK has exposed the challenge investors face to sell such assets quickly if wider turmoil in financial markets require them to raise cash.

Many private equity groups have not yet marked down the value of their portfolio companies in line with the fall in the value of listed companies this year. As a result, this has left some pension funds overexposed to private markets which are a higher proportion of their total assets.

The managers of Harvard University’s $51bn endowment last week warned of significant markdowns to come in its private equity portfolio, saying they expected “meaningful adjustments” to the value of its private fund holdings at the end of the year as annual audits force funds to cut valuations.

The FCA declined to comment.