Private Equity Club FSA Discussion Paper Monday 15 January PricewaterhouseCoopers LLP

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1 Private Equity Club FSA Discussion Paper Monday 15 January 2007 PricewaterhouseCoopers LLP

2 Agenda Presentation Peter Linthwaite Chief Executive, British Private Equity and Venture Capital Association Bruce Robson Manager, Asset Management Team, FSA Discussion PricewaterhouseCoopers LLP April 2006

3 Peter Linthwaite Chief Executive BVCA The British Private Equity and Venture Capital Association

4 Overview 1. BVCA The British Private Equity and Venture Capital Association 2. Growth of the industry 3. Economic impact of industry 4. Characteristics of private equity firms and activities the model 5. History of regulation 6. FSA paper: why; findings; risks; where next 7. Conclusion regulation where next?

5 BVCA -The British Private Equity and Venture Capital Association UK industry body Membership of over 370 firms Represents over 90% of UK-based private equity and venture capital UK market accounts for over 50% of whole European market More than 23 years experience

6 Growth of industry - I Amounts invested in UK companies ( m) 1985, 1995 & Early stage Expansion MBO/MBI Total source: BVCA Report on Investment Activity 2005

7 Growth of industry - II UK funds raised ( bn) by BVCA member firms average 1980 s, 1990 s & 2000 s average 80's average 90's average 00's Funds raised bn source: BVCA Report on Investment Activity 2005

8 Economic impact of industry Private equity industry invests, builds businesses and creates employment across all sectors Companies our members have invested in employ 2.8m people, c.19% of UK private sector employees Private equity is an important revenue generator within the financial services industry 2005 fee revenue 3.3bn, 7% annual turnover of UK financial services industry

9 Characteristics of PE firms and activities Predominately institutional investors Low volume high value transactions Each deal is unique Highly skilled but small numbers of staff Use of external advisors/consultants

10 History of regulation Since 1988 private equity firms subject to regulation 1980s & 1990s IMRO (Investment Management Regulatory Organisation) supervision November 2001 FSA took over from IMRO FSA recognised industry not core risk to statutory objectives March 2000 European Financial Services Action Plan (MiFID; Capital Requirements Directive)

11 FSA paper why? Profile of the industry Growth of the industry Need to pull together understanding of the industry FSA leadership role regarding European regulation

12 FSA paper findings Recognised diversity and breadth of the industry Acknowledged importance to dynamic economy Good historic regulatory record Flagged areas of potential concern/risk Current regulatory framework seen as effective, proportionate and adequately resourced

13 FSA paper potential risks Significance High Medium high Medium low Low Risks Market abuse Conflicts of interest Excessive leverage Unclear ownership of economic risk Market access Market opacity Reduction in overall capital market efficiency

14 FSA paper where next? FSA consultation responses by 6 March 2007 BVCA members to respond to BVCA by 26 January 2007 Follow up - conflict of interest - ownership of economic risk

15 Conclusion regulation where next? MiFID need for uniformity interpretation / implementation Increased recognition of value of equality of parties and use of contract Identify and work with FSA on new development in the industry Regulation is light touch but could be lighter New challenges

16 Peter Linthwaite Chief Executive BVCA The British Private Equity and Venture Capital Association

17 Private Equity Club FSA Discussion Paper Monday 15 January 2007 PricewaterhouseCoopers LLP

18 FSA Discussion Paper: Private Equity: a discussion of risk and regulatory engagement Bruce Robson Manager, Asset Management Sector Team

19 Agenda Development of the Private Equity Discussion Paper Way forward, update on feedback FSA s supervision of Private Equity firms, including FSA structure FSA s risk-based approach More Principles Based Regulation

20 Development of the Discussion Paper Six reasons why DP published: Significant growth in capital inflows Leverage has increased Extended reach of PE deals Development of a secondary market Shrinking UK equity market Perceived lack of understanding Focus has been on large and mid cap market Reviewed PE market in context of other alternative asset classes

21 Development of the Discussion Paper Aims were: To stimulate debate Clarify our risks to our statutory objectives Inform stakeholders Identify proportionate mitigation Solicit views from stakeholders Overall aim was to ensure the level and form of regulatory engagement is optimal

22 Development of the Discussion Paper Risks identified: Excessive leverage (medium high risk) Unclear ownership of economic risks (medium high risk) Reduction in overall market efficiency (low risk) Market abuse (high risk) Conflicts of interest (high risk) Market access constraints (medium low risk) Market opacity (medium low risk) Summary is our current regulatory architecture is effective, proportionate and adequately resourced, but also established an alternatives centre of expertise Proactive market surveillance of credit markets

23 Way forward Feedback still open until 6 March please contribute Feedback statement likely in Q2/07 Possible Consultation Paper (with full MFA and CBA) if policy changes (e.g. new rules) are needed Feedback to date has been limited only one formal response so far Oral feedback

24 FSA structure

25 FSA s supervisory approach Centre of expertise in alternatives Relationship manage hedge fund managers (25 groups) and private equity firms (14 groups) Firms not funds senior management responsibility Top-down systems and controls Higher impact: more frequent risk assessments Lower impact: case work and review of returns All firms: thematic work, particularly for nonrelationship managed firms Compliance standards in early 2005 Financial crime review in late 2005

26 Probability assessment Probability in firms is assessed against 9 risk groups and capital: Environmental Environmental risks Business Model Customers, Products Markets Business Process Prudential MH & Controls Customer, Product & Market Controls Financial & Operating Controls Prudential Risk Controls MH- MH- Capital ML- MH- ML H H- ML Risk Management Control Functions Oversight & Governance Management, Governance and Culture Mitigants Net Risks Customer Treatment & Market Conduct Operating H H Financial Soundness H Business Risks Controls Oversight & Governance Total MH- ML+ H- H

27 More Principles Based Regulation More and rebalance (8,500 pages of rules v 11 principles) Implications for firms continuing/enhancing reliance on senior management more attention to outcomes less prescription, more responsibility & opportunity more interesting/difficult judgements Implications for consumers better outcomes, fairer deals, continued market confidence Implications for the FSA move away from box-ticking discussions on broad issues rather than demonstration of compliance with rules conscious of retrospective vision consistent judgements

28 Feedback please

29 Thank You. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member firms of PricewaterhouseCoopers PricewaterhouseCoopers International Limited, eachllp of which is a separate and independent legal entity.

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