UK Regulators Probe Major Banks' Role in $8.2 Trillion Private Equity Leverage Game

The UK's regulatory authorities are scrutinizing some of the world's largest banks to understand their role in boosting leverage for private equity firms within the controversial $8.2 trillion merger and acquisition sector.
Sources revealed that the Prudential Regulation Authority (PRA) has requested banks to provide more detailed information on net asset value (NAV) loans extended to acquisition funds. The PRA’s inquiries include how much capital banks have allocated for these loans and the level of leverage provided to fund managers.
A spokesperson for the PRA declined to comment.
NAV loans enable fund managers to secure borrowings using a pool of company assets as collateral, a practice that has sparked controversy due to the additional leverage it allows. This leverage often compounds on top of initial loans taken by fund managers during the acquisition of a company.
While NAV loans have existed for over a decade, the volume of such transactions has recently declined, compelling many fund managers to use this method to offer liquidity to early investors. This shift is particularly notable when asset sales are not feasible due to weak transaction demand, leading to explosive growth in the NAV loan market, which is now estimated to be around $100 billion globally.
Many bankers and other industry participants publicly support the provision of NAV loans, arguing that these loans are priced to reflect their respective risks. They emphasize that even in a sluggish deal environment, NAV loans remain a crucial tool for private equity giants to manage liquidity.
The PRA's concern centers around the potential for significant declines in the value of the underlying asset pools, which may be detected too late by banks.
“The worry is about leverage upon leverage,” said Jackie Bowie, Managing Partner at Chatham Financial, a risk management consulting firm, indicating a vulnerability to compounded financial hits.
Some insiders noted that the PRA's focus on NAV financing is a part of a broader examination by the central bank into private equity financing. To date, the regulatory body's scrutiny has concentrated on how banks manage counterparty credit risks within private equity financing.