A crisis in the UK’s shadow banking or private equity-funded sector would put millions of jobs at risk, a senior Bank of England official has warned.
Nathanaël Benjamin, the bank’s executive director for financial stability, strategy and risk, said many companies now depend on private equity funding and complex or opaque financial structures.
Benjamin said: “With many UK companies (large and small) reliant on private markets for financing, a shock to this sector – driven by investor losses and/or a decreased appetite for private assets – could limit their ability to access the financing they need, which could lead to cutbacks in investment and employment.”
On a worldwide scale, he estimates private credit is worth $2 trillion (£1.6 trillion) and around £250 billion in the UK.
In total and including their supply chains, British companies backed by private equity and venture capital employ 3.5 million people, he said.
Benjamin added: “Private equity is particularly vulnerable to this given its extensive use of leverage and the illiquid nature of its investments.
“Some companies sponsored by private equity have turned to refinancing solutions which delay crystallisation of risks.
“That includes ‘amend and extend’ or ‘payment in kind’ agreements. While these agreements can help smooth through the stress, the risk is that the impact of higher rates is simply delayed, and an extension gives false comfort, increasing credit losses in the future.”
While banks have reduced their role in business finance, Benjamin added they are still heavily indirectly exposed through funding of private equity.
“There are natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem.
“And I cannot resist pointing out the ironic contradiction in banks, on the one hand worried about the threat from non-bank players, but on the other hand keen to help them leverage themselves up,” he told The Telegraph.
A lack of data about the risks of a private equity downturn is adding to the uncertainty, he added.
