Leveraged financing is fuelling a significant expansion of the European private equity market. But the increasing level of debt used to finance private equity deals could leave transactions exposed to certain weaknesses in the event of a workout, according to the Financial Services Authority (FSA), the U.K.'s financial watchdog.

Thirteen banks responded to a recent leveraged buyout (LBO) survey conducted by the FSA and reported a combined exposure to private equity of 67.9 billion ($86.8 billion) by June 2006, compared with 58 billion at June 2005. The survey found that banks are increasingly distributing debt to non-banks such as CLO managers, CDO managers and hedge funds. On average banks distribute 81% of their exposures to their largest transactions within 120 days of finalizing a deal.

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