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Regulation impacting investors in private equity and venture capital

 
Insurance companies
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The prudential treatment of private equity assets held by insurance companies could impact the amount that insurance companies invest in private equity and venture capital, and thus the amount of funds available for investment into private equity and venture capital backed businesses.

Insurance companies are also an important source of funding for BVCA members, committing 9% and 5% of funds raised in 2015 and 2014 respectively.

Solvency II is the prudential framework for European insurance companies. It sets out the methods for measuring the risk associated with assets held by insurance companies, and the requisite capital they are required to set aside against those assets. Firms have the option of building an internal model to calculate capital requirements (which must be approved by the regulator) or use the standard formula.

During the implementation of the directive, which came into force at the start of 2016, the European Insurance and Occupational Pensions Authority (EIOPA) initially suggested a risk weighting of 49% for private equity assets under the standard formula. This was subsequently lowered to 39% following industry pressure but only for AIFMD-authorised managers of AIFs that are closed-ended and unleveraged (EuVECAs are also subject to the same treatment). Transitional provisions – which allow a gradual increase to 39 per cent over 7 years for existing holdings – will also apply. These risk weightings will be revisited in 2018 as part of the Capital Markets Union initiative.

Pension funds
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Pension funds are traditionally the most significant source of funding for BVCA members, committing 16% and 25% of funds raised in 2015 and 2014 respectively.

The prudential regulation of pension funds can impact on the amount that pension funds allocate to private equity, and thus the amount of funding available to the real economy.

The Institutions for Occupational Retirement Provision Directive (IORP) established a pan-European regulatory framework for ensions funds. IORP caps the amount pension funds may allocate to all alternative assets, including private equity, at 30% of total assets. The reform of the directive, IORP II, which was agreed in 2016, does not include any new capital requirements.

In April 2016, the Pan-European insurance and pensions regulator – EIOPA – announced that it would shelve its work on the possible introduction of harmonised solvency capital requirements for pension funds. Instead, EIOPA recommends introducing a “common framework for risk assessment and transparency” based on common valuation rules and a standardised risk assessment. Pension funds would be required to produce a market-consistent balance sheet and publish the results of certain pre-defined stress scenarios, but they would not be subject to European-level capital requirements. It is for the Commission to decide whether or not to take the recommendations forward.

Retail investors - PRIIPs
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Although private equity and venture capital funds are typically marketed to institutional investors, some funds also market to other investors that do not meet the definition of a professional investor under MiFID II (which is more restrictive than the current UK regime).

The Packaged Retail Investment and Insurance-based Products Regulation (PRIIPs) requires that when an investment product is marketed to a retail investor, it must be accompanied by a Key Information Document (KID). The KID should provide short, clear and comparable information written in accordance with a common standard so that retail investors can better understand the risks and costs associated with an investment decision.

The PRIIPs Regulation was formally adopted in 2014 was due to come into force on 31 December 2016. However, the Regulatory Technical Standards (RTS) that outline the methodology and formats to prepare a KID have not been finalised. Following the European Supervisory Authorities’ (ESAs) consultations, the RTS proposed by the Commission, were rejected by the European Parliament and the Council over the summer of 2016 (by an overwhelming majority). The timetable for implementation is now unclear.

Owing to the extremely wide scope of the Regulation, both in terms of the products covered and the definition of a 'retail investor', the requirement to prepare a KID could apply to private equity and venture capital firms when it comes into force. The BVCA has called for a delay in the implementation of the Regulation to give firms more time to comply with the new rules, particularly after the rejection of the detailed RTS.

The BVCA has kept its members informed of recent developments through its technical updates and further detail on scope and representations on the preparation of the KID can be found in our submissions below. Contact us for further detail on the forthcoming ESMA Q&A and our comments on the scope of the Regulation.


 
Further information

FOR FURTHER INFORMATION PLEASE CONTACT THE BVCA

 +44 (0)20 7492 0400

 policy@bvca.co.uk