The risks associated with private equity funds are greatly reduced when the companies are listed, according to the Association of Investment Companies. In its response to the Financial Services Authority's discussion paper on the industry, the AIC said that the higher governance and transparency requirements that apply to listed firms reduced conflicts of interest concerns.

Private equity has hit the headlines because of a series of high-profile takeovers and the ruthless "short-termist" approach of some companies. Chancellor Gordon Brown recently discussed issues such as the tax breaks on the shareholder debt which is used to fund deals and a code of practice to raise the standards of disclosure between private equity managers and investors.

The FSA has suggested that potential costs of interest between shareholders and managers of private equity funds could cause problems. The trade body argued, however, that potential problems connected with transparency were reduced for listed companies because they are required to meet higher standards in relation to regular public reporting. It added that its members have independent boards with legal obligations to ensure that the interests of shareholders are properly considered when potential conflicts between investors and managers arise.

'Small but significant'

Daniel Godfrey, AIC director general, said: "The listed private equity investment company sector represents a relatively small but significant part of the total UK private equity market. The listed company structure acts to reduce the risks which have been identified by the FSA. We hope that the FSA will recognise this by ensuring the rules governing the listing of private equity funds are liberalised to allow the expansion of the sector
The AIC dismissed suggestions that private equity was more prone to market abuse than any other area of the financial services market. It said that the problems that the industry had suffered from in the past connected with imposing confidentiality agreements were likely to diminish as the market matured. It is the question of confidentiality and market abuse that the regulator is likely to be quizzed about when it comes under the gaze of MPs at a forthcoming Treasury Select Committee hearing.

Information misuse

Philip Rubens, head of Finers Stephens Innocent's financial services practice, said that the regulator is concerned about information that may be gained from private equity houses during the course of a transaction.

"There is still a risk that an individual in a private equity house may misuse the non-public information for his or her own benefit. I think that is something that is of real concern for the FSA in that so many people may have access to non-public information in relation to the potential acquisition of a target company and whether that information is being misused by individuals for their benefit in circumstances where they should not be acquiring or selling shares. There may be some circumstances where they will be selling short," he told Complinet.

The AIC also responded to the FSA's concerns about the restricted access to private equity. It said that traditional private equity investment involved significant barriers to entry. Listed investment companies could, however, offer access to retail investors at a low cost and with low minimum investment requirements as well as liquidity because their shares are freely traded on the stock market.

Routine

The FSA has yet to rule out that a routine share price investigation of US private equity firm Kohlberg Kravis Roberts' $19bn buyout approach of UK high-street chemist Boots could show signs of insider trading.

Media reports criticised the approach, which KKR announced last week, because it attracted the backing of Italian billionaire Stefano Pessina. Pessina controls a 15 per cent stake in Boots, and critics argue that this raises questions about the impartiality of the move.

The spokesman said the regulator would look for unusual share volumes. "The FSA will investigate such movements as a matter of routine," he told Complinet.

The FSA recently developed a statistical model for researching numbers of UK deals where insider trading was suspected to have taken place. "This gives us an indication of what may be going on, but we can't say for definite that there is insider trading in any given case," the spokesman added.