Under scrutiny

UK watchdog the FSAis studying private equity with greater intensity than ever. The industry stands to benefit.

Along with Singapore, Great Britain is one of just two countries in the world where private equity is a regulated industry. And at a time when UK private equityindustry is making great strides, it shouldn't come as a surprise that the regulator is spending more time trying to understand how the industry works and whether its growing influence within economics and finance is good or bad, and for whom.

Currently more than 200 UK private equity and venture capital firms are authorized and supervised by the Financial Services Authority (FSA), whose staff comes into contact with the industry on a daily basis. For example, they enforce rules that require private equity firms' employees to undergo training and pass exams in order to work as investment professionals with fiduciary responsibility. The FSA also watches over the way in which private equity firms raise capital and takes a particular interest in funds aimed at retail investors.

Other areas of relevance include the FSA's rules on money laundering, where the watchdog recently found that too many UK private equity firms were in fact unaware of the procedures they have to follow in order to be in compliance. Late last year a letter was sent to member firms of the British Venture Capital Association (BVCA) urging them to do their homework on money laundering in order to avoid missteps.

Private equity firms have long found the FSA's rules on training and fund marketing barely applicable to their industry and hence tedious. On the other hand, episodes such as the money laundering intervention aside, it is fair to say that the FSA has historically paid only a limited amount of attention to buyout houses and venture groups over the years.

Task force
However, now that private equity's influence in UK corporate finance and capital markets has grown dramatically, the FSA has decided that it needs to understand in more detail precisely what its recent rise to prominence means for Britain's companies and markets.

To find answers, the body's wholesale investment funds division last year set up a task force to study the industry. Other non-mainstream and increasingly important areas of financial innovation such as hedge funds, novel insurance products, credit derivates and CDOs are also being looked at.

The project is ongoing and is yet to result in anything concrete. All the FSA has done so far is to make mention of the rise of private equity as a phenomenon in need of analysis. In January, the FSA included a section on private equity in its ?2006 Financial Risk Outlook? – a key document that each year sets out the FSA's key policy priorities. Tellingly, it was the first time that the ?Outlook? featured a page devoted to private equity.

According to the document, private equity's recent growth relative to the public market is an issue that needs to be considered. The FSA is keen to determine the effect the trend may be having ?on the efficiency of the overall capital markets and whether the leverage and illiquidity inherent in private equity structures may increase the risks to financial stability.? Another question the FSA is concerned with is whether ?market standards, including those related to transparency and disclosure, remain appropriate given the increasing, albeit indirect, interest of retail investors.?

On the face of it, the regulator's newfound interest in private equity may seem like a threat to the industry. However, if the current scrutiny leads to greater understanding, the risk of private equity being saddled with poorly designed and barely relevant rules could diminish.

In fact, the BVCA is of the view that at present the FSA is generally moving in the right direction. In January, the BVCA published a statement in support of an ongoing FSA effort to deregulate in certain areas and to replace its current rule-based approach to financial supervision with a less prescriptive framework based on a greater risk-based approach. Eventually the FSA's rules governing professional competence might be revised as a result.

To the extent that the BVCAworries about regulatory intrusion, it isn't just looking to London's Canary Wharf, where the FSAis based, but to Brussels. According to BVCA chief executive Peter Linthwaite, had the European Union's Markets in Financial Instruments Directive (MiFID) – on which the BVCA has lobbied intensively for change – been implemented in its original form, it could have burdened the industry with unhelpful and unnecessary rules at a time that the FSA was looking to develop a more appropriate framework of regulation.

GSC Partners broadens ownership structure
Alternative investment firm GSC Partnershas undergone a recapitalization to allow more employees an ownership stake in the business, according to a press release from the Greenwich, Connecticut-based firm. The recapitalization of the debt-focused firm was led by UBS Securities. The firm, led by chairman and CEO Alfred Eckert, also announced the appointment of several senior executives, all of whom will be given partial ownership of GSC Partners. Ten senior managing directors were named and twelve managing directors were named. GSC Partners, which has more than $9 billion in assets under management, specializes in distressed debt investment, corporate credit, mezzanine lending and structured finance. Last year the firm expanded into commercial real estate in China and a real estate investment trust. In a statement, Eckert said proceeds of the recapitalization would also serve to support further expansion of the firm. ?[T]his more flexible capital structure will provide more financial flexibility and allow us to offer ownership in our firm to all of our employees, so that we can continue to attract and retain world-class talent,? Eckert said.

Mexico launches new company structure
Hoping to attract more foreign investment, Mexican regulators have created a new corporate structure – the Sociedad Anonima Promotora de Inversion (SAPI). The structure is designed to make it easier for investors in mid-cap companies to gain liquidity through a public listing. Once a company becomes a SAPI, it is given a threeyear grace period to adopt the corporate governance and other requirements of being listed on Mexico's Bolsa exchange. According to Dr. Jose Antonia Gonzalez Anaya, who spoke at the Economist's Latin American Private Equity Conference last month, the new structure will also make it easier for GPs to enforce tag-along and dragalong rights

CapMannames deputy CFO; fundraiser
CapMan, the Scandinavian private equity firm, has named Kaisa Arovaara as deputy chief financial officer of the firm. Arovaara worked for ten years at Ernst & Young in Helsinki and New Zealand prior to joining CapMan. Among her clients were private equity firms. Arovaara will report to CapMan CFO Olli Liitola. Arovaara will also serve as a member of CapMan's Management Group during Liitola's sabbatical leave from February 8 to July 7 of this year. In related news, CapMan has appointed Jerome Bouix to its fundraising team. He will be responsible for fundraising, investor relations and communications. CapMan has approximately €2.2 billion in total capital and a team of 90 people in Helsinki, Stockholm, Copenhagen and Oslo.

TowerBrook poaches Gap exec; expands in London
TowerBrook Capital Partners, the Soros Private Equity spinout, has begun a march into the retail and hospitality space with the hiring of Gap's Andrew Rolfe. Based on Rolfe's background, the hiring signals a push into retail by Tower-Brook, whose portfolio has traditionally leaned toward the healthcare, energy, media and communications sectors. Rolfe joined Gap in November 2003 to oversee the company's operations in France, Germany, the UK and Japan, and to help spearhead further geographic expansion of the brand. Rolfe's role at TowerBrook will be as an advisory board member and senior venture partner, according to a statement from the firm. In related news, TowerBrook has hired the former co-founder of Elwin Capital Partners, Winston Ginsberg, as a managing director in London. Ginsberg will be involved in deal sourcing and execution in TowerBrook's key sectors. Prior to TowerBrook, Ginsberg was a general partner and co founder of London-based Elwin Capital from 2000 to 2005. ECP is a venture capital technology investor, focusing on the communications, semiconductor, services and software sectors.