FSA ignores club deals

Debate continues surrounding the publication of the FSA’s ‘discussion paper’ on private equity earlier this week.

This comes amid reports that US antitrust authorities are closing in on five of the largest global private equity firms the Carlyle Group, Clayton Dubilier & Rice, Kohlberg Kravis Roberts (KKR), Merrill Lynch and Silver Lake Partners. Each firm has reportedly been requested to list all the documents relating to club deals since the beginning of 2003.

In view of this, industry bodies have been quick to highlight that the FSA report did not raise similar concerns regarding club deals.

Speaking to IFR Buyouts Peter Linthwaite, chief executive of the BVCA, said: “It is difficult to comment on what is happening in the US as I don’t know all of the machinations of what is going on, but there are two major differences in the UK: all private equity firms are regulated and subject to conduct of business rules by the FSA; and there is the Takeover Code that regulates the conduct of all private equity bids.”

With regards to collusion to keep pricing down Linthwaite adds: “I don’t see what the argument is regarding a public company bid, whether it is a club deal or not. If you make a bid for a public company, it is either acceptable for the shareholders or not. You could have fifty bids and if they are all deemed unacceptable, the deal won’t happen. To sell a company you need a willing buyer and a willing seller. It is difficult to see how collusion plays a role in public bids.”

However the FSA has identified clear areas of ‘high risk’ which could lead to certain houses being more closely monitored going forward.

Main areas of concern include market abuse, with the significant flow of price sensitive information in relation to private equity transactions creating considerable potential for market abuse; conflicts of interest between the fund and its managers and staff, the investors in separate funds and its portfolio companies; excessive leverage which it claimed has made defaults ‘inevitable’ and which in extreme cases could effect financial stability in the UK economy; unclear ownership of economic risk and lower down the risk scale – market opacity and market access constraints with limited access for retail investors.

Industry sources argue that these risks, especially with regards to excessive leverage, predominately centre around the relatively small community of larger funds and mega deals in the UK.

Some also claim that in an environment where all eyes are on private equity the FSA has chosen headline grabbing issues merely to flex its muscles and prove its grasp of the industry.

On source said: “The FSA’s general approach is sensible but I think the report is quite headline grabbing. I think it is a statement that the FSA is on top of this market given the generic publicity it has been getting. Although the issues discussed are correct I think that many of them only really apply to the top of the market. For example they are right about the problem of excessive leverage but this really only applies to say a major utility company which is a matter of public interest and is potentially overloaded with debt”.