FRANKFURT - The head of Germany's financial watchdog warned on Thursday of the threat to the country's banks of private equity deals funded through heavy borrowing.
"Target companies are running the risk of collapsing at the next economic downturn, at the latest, because of the riskier financing," regulatorBaFin's Jochen Sanio told reporters in Frankfurt.
Private equity groups typically invest in companies through leveraged buyouts where the purchase is paid primarily with debt.
Many observers have been growing worried that low interest rates make it possible for those investors to borrow too much.
While acknowledging that German banks were exposed primarily to less risky deal debt and that those involved had taken measures to avoid problems, Sanio warned: "That has not yet had to stand the test of tough times."
Sanio said few were able to decipher who was at risk in such deals and warned that private equity investors were operating in unknown territory.
"I ask myself how even basic market discipline should work here," he said.
He added: "If those target companies ever run into trouble, hopefully no bank will discover that they oversaw one or other risk that are in such highly complex (deal) constructions."
Private equity firms have always downplayed talk of borrowing risks.
But they have come under increasingly close public scrutiny as the size of their investment funds have steadily grown.
Last year, one of Germany's biggest listed companies, tire maker Continental, said it had been approached by such an investor interested in a takeover.
Private equity firms have received a hostile reception from some in Germany. The country's now deputy chancellor Franz Muenterfering once likened the tactics of some financial investors to that of locusts.
Politicians have since talked about the need for a private equity law to regulate their behaviour, and German Finance Minister Peer Steinbrueck hopes to put forward proposals soon.
