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Regulation of private equity

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Abstract

Private equity refers to highly leveraged merger and acquisition activity aimed at alternative assets with the involvement of specialised management assistance. The beneficial elements of private equity include the creation of job opportunities and contribution to economic growth. The fact that investments are made in alternative assets makes the market somewhat opaque to outsiders, and the lack of standardised methodologies for disclosure and performance reporting limits the availability of a lender to monitor the credit quality of a borrower. The major area of (regulatory) concern in private equity relates to the use of leveraged finance. Increase in the availability of debt capital and the emergence of new funding techniques led to a private equity boom in the beginning of the 2000s, with a resulting magnification in transaction frequency and value. In addition, multiples rose, transaction structures were extended and covenants weakened. These new properties of the private equity market raised concerns about the risks associated with the provision of leveraged finance by various financial institutions. Providers of leveraged finance are now subjected to distinctive risks that in the case of realisation may have implications on financial stability. The fact that the private equity market demonstrates similarities to the US sub-prime the mortgage market has raised further concerns about systemic risk present in the sector. This article asks the question if the inherent features of private equity provide for risks that can result in systemic instability and thus create a rationale for regulation.

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REFERENCES AND NOTES

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  1. Öregrundsgatan 11 (301), 11 559, Stockholm, Sweden

    Andreas Heed

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1holds an LLM degree in Banking and Finance Law from Queen Mary, University of London. Heed has also studied law at the University of Stockholm, where he earned his first law degree. During his studies, he worked as a trainee at an international law firm where he worked mainly with capital market and corporate law. At present, Heed is preparing a research proposal regarding fund regulation as his intention is to pursue a PhD in the United States.

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Heed, A. Regulation of private equity. J Bank Regul 12, 24–47 (2010). https://doi.org/10.1057/jbr.2010.4

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