unquote" regulation update: Solvency II

Anneken Tappe
16 March 2012

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In this week's unquote" regulation update, Anneken Tappe looks at the latest developments in Solvency II.

The impact of Solvency II on the private equity industry comes in the form of changed rules and requirements for insurers. Investments in PE funds, grouped with hedge funds and other alternative assets, are subject to capital requirements ranging between 40% and 59%. This means the industry is likely to see a flight of insurers as institutional investors, further complicating the already tough post-financial crisis fundraising environment.

"This is not a very optimistic situation for institutional investors," says Isabel Rodriguez, partner at SJ Berwin and member of the Legal and Fiscal Committee at Spanish trade body ASCRI.

In Germany, Ulrike Hinrichs, managing director of PE association BVK, fears that the new legislation might cause an entire investor group to disappear:

"Participating in PE will become rather expensive in comparison to other asset classes and lose its appeal," she notes.

Charles Diehl, partner at French mid-market firm Activa Capital, also suggests that Solvency II is a form of penalty for insurers investing in PE
products: "The lack of liquidity should improve the rating of private equity in the eyes of the insurance industry, considering the volatility of the public markets."

Funding takes another hit
The problematic future of fundraising is the foremost concern of the industry. Joe Steer, head of international public affairs at the BVCA, points out there would be no complaints if regulation was effective and proportionate to the industry, "but the current proposed capital ratios of Solvency II will make it more difficult for private equity to raise funds."

Besides the dominant issue of fundraising, the classification of private equity investments is another point of outrage in the industry.

"The regulations lump private equity in with hedge funds despite them being such radically different asset types," says Baird Capital Partners Europe chief executive Simon Havers.

Koos Teule, director of investment relations at Gilde Buyout Partners,
agrees: "Hedge funds and private equity should be separated, because they have different liquidity and risk profiles. But we also need to understand the regulator's side. It's probably the smallest issue on their minds."

Industry sentiment suggests that a shrunken LP base is widely expected - both Havers and Teule are certain the updated Solvency provisions will result in fewer investments from insurers. However, the definitive effects of the directive are debatable until the provisions are fully implemented, which in itself creates another issue: "Uncertainty like that is never good," points out Diehl.