Not-so-private questions
The private equity market has grown in size, complexity and interconnectedness. Nat Benjamin steps through the vital role it plays in financing companies, describes recent developments, and asks questions about the impact of dynamics in that sector on safe and sustainable growth
Good morning, all. I am delighted to be here today to discuss a very important topic: private equity. I will step through the growth in the market, its important role in supporting companies to access finance, and the emergence of different players in that ecosystem. I will also explain why I have concerns about certain aspects of the developments in private equity and interconnected markets. That is something I have spoken about before, 1 and which the Bank of England’s Financial Policy Committee (FPC) – of which I am now a member – has been highlighting in recent communications. 2
Shining a light on the current dynamics in the private equity market is crucial at this juncture, given the important role the sector plays for the real economy. Indeed, making sure that the financial system evolves in a way that is conducive to safe and sustainable financing practices is essential for durable economic stability and growth in the UK. It is important for the FPC to consider both its primary and secondary objectives in the round: financial stability as well as supporting the government’s economic policy to achieve strong, sustainable, and balanced growth. And with that combined lens, in a sense, financial stability is a means towards the ultimate goal of promoting the good – the welfare – of the people of the UK for the long term. As I embark on my role within the FPC, this will be a key area of focus for me. And in my opinion, private equity is perhaps the most material case at the moment that demonstrates the importance of this combined lens.
That is because recent developments in that market have the potential to disrupt the supply of funding to real economy companies in a stress. And to cause systemic institutions – such as banks – to experience significant and correlated losses on their exposures linked to private equity. These dynamics, as well as exogenous shocks, could all be amplified by vulnerabilities in this sector, such as opacity and interconnectedness across institutions and markets. So this is typical financial stability ground. That’s why we care.
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