Federal Treasurer Peter Costello believes the increasing number of private equity deals poses no immediate risk to the Australian financial system.
“Let me say we see no immediate risk to the financial system in any respect,” Costello told the ASIC summer school in Sydney yesterday.
“Our financial system is well capitalised and enjoying very strong profits. But we will be having a look at what may emerge if private equity grows substantially over three, five or 10 years.”
He said the Council of Financial Regulators, which consists of the Reserve Bank of Australia, the Australian Prudential Regulation Authority, ASIC and Treasury, was preparing a report on this issue.
“While the Australian private equity market is still relatively underdeveloped – as a proportion of both GDP and mergers and acquisitions activity – we can expect that Australia will continue to receive more attention from large international private equity firms,” he said.
“We can also expect private equity investment in this country to continue to grow.”
Foreign private equity firms have recently taken stakes in media giants Channel 7 and Publishing and Broadcasting Limited, while Qantas is the subject of a high-profile $11.1 billion bid by an Australian, American and Canadian corsortium that includes Macquarie Bank.
Costello warned there were risks associated with the highly-leveraged nature of some private equity transactions – some are 80 per cent debt-funded – as well a tendency towards complexity and a lack of transparency.
“In many private equity arrangements, investors will be borrowing from overseas. This will make Australian companies sensitive to international economic shocks or market downturns,” he said.
In his opening address, ASIC chairman Jeffrey Lucy said Australia’s increased integration in global capital markets, including the surge in private equity, had positive effects for improving investment levels but accentuated the exposure to potential regional collapses and downturns.
