The private equity industry is large, international and opaque
News, Staff memo From an international standpoint, the Swedish private equity industry is notable for having relatively large private equity firms that manage capital from international investors. Analysis in a new Staff Memo shows that the private equity industry is large both in terms of assets under management and in terms of the number of companies owned by private equity firms. While there are risks associated with the high level of indebtedness and the lack of transparency, the study concludes that the financial stability risks in Sweden appear to be limited at present.
The authors Mathias Andersson, Anders Kärnä and Samantha Myers, all of the Financial Stability Department, analyse private equity from a Swedish perspective and highlight potential risks to the financial system. Private equity firms are companies whose business model involves investing in unlisted companies, making them more profitable and then selling them on. The authors’ analysis covers the companies acquired, the private equity firms, the ultimate investors, and lenders to private equity in the form of both banks and private credit funds.
Private equity investments are often financed both with capital from external investors and with funds borrowed by the acquired companies. This increased indebtedness can make the acquired companies more vulnerable and lead to credit losses for lenders if investments fail. At the same time, there is no other evidence that they face an increased risk of bankruptcy. However, this could change if global interest rates were to rise sharply again and remain at high levels for an extended period.
Investors in private equity firms are mainly institutional investors such as pension funds. Such professional investors are deemed to have a good ability to assess the risks they take when investing in private equity firms and to manage potential losses. Swedish banks have reduced their lending to private equity-owned firms (and the companies they aquire) and their role has been partly replaced by so-called private credit funds. This reduces the risks to the Swedish banking system but borrowing activity is therefore less transparent and more difficult to monitor.
Authors: Mathias Andersson, Anders Kärnä and Samantha Myers, working at the Financial Stability Department
Staff memos
A Staff Memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the appropriate Head of Department. The opinions expressed in Staff Memos are those of the authors and should not be regarded as the Riksbank’s standpoint.