Taming the Private Equity “Locusts”

The EU's political will to regulate private equity and hedge funds is growing. While nobody wants to ban or unnecessarily restrict them, it has become clear that they must become subject to the same transparency, disclosure, and tax rules as banks and mutual funds.

The full repercussions of the financial crisis triggered by bad mortgages in the United States are still unclear, but the unforeseen effects already include an unstoppable demand for greater transparency in financial markets, and better regulation.

One part of the financial markets not subject to the transparency and disclosure rules that apply to, say, banks and mutual funds, are hedge and private equity funds. Once relatively small, the five biggest private equity deals now involve more money than the annual budgets of Russia and India. Assets in private equity and hedge funds stand at $3 trillion today and are expected to reach $10 trillion by the end of 2010. The funds now rely heavily on investment from pension funds, and on money borrowed from banks and other non-private sources.

Indeed, these private funds account for about two-thirds of all new debt. So, if there is a debt problem, as in the US mortgage crisis, one must also look at private funds’ role in creating it. They are, in short, a major challenge to financial stability, and, unless regulated, they are likely to contribute to future crises.

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