European insurance companies could invest more heavily in continental private equity following an alteration to the Solvency II directive.
The European Commission has reduced the amount of capital insurers must set aside to manage the perceived risks for some long-term equities. Funds that meet certain criteria, such as being unleveraged, closed-ended and an EU fund structure such as the European long-term investment fund, will now be given a 22 percent risk-weight, compared with the 39 percent or 49 percent previously required.
The move came as part of the Commission’s Capital Markets Union Action Plan, which aims to boost jobs and growth by increasing investment into Europe’s privately held companies.
“Solvency II made it very difficult to invest in unlisted equities and unlisted debt,” Hugo Laing, corporate insurance partner at Eversheds Sutherland, told Private Equity International. The directive came into effect across all EU member states in January 2016.
“The stress tests they applied to unlisted equity were very penal unless it was listed equity or an investment of a strategic nature […] which limited the scope to make pure investments in businesses. You were essentially halving your investment because the capital you need to hold is almost half the value of the asset, up to 49 percent, which meant unlisted equities were far less attractive.”
Some 21 percent of European insurers planned to increase their net asset allocation to private equity and equities in 2018, according to Goldman Sachs Asset Management’s Foggier as We Climb GSAM Insurance Survey.
Insurers have no shortage of assets: the industry had more than €10 trillion invested in bonds, company shares and other assets in 2017, according to Insurance Europe data. Insurers provided 8 percent of the €91.9 billion raised for European private equity in 2017, compared with 29 percent from pensions, per Invest Europe.
Some of Europe’s largest insurers have fairly modest exposures to the asset class. AXA Group, which has €1.4 trillion of assets under management, has a 10 percent allocation to alternatives and 4 percent allocation to private equity, according to PEI data. The SFr 233 billion ($232 billion; €205 billion) Swiss Life has a 28.7 percent allocation to alternatives and just 1.2 percent to private equity.
The Solvency II change will be welcomed by private equity managers, as the long-term nature of insurance companies makes them attractive limited partners, added Kristina Widegren, principal at European placement agent Rede Partners.
“Some of the larger insurers have continued to have big programmes and private equity has been an important part of their investments,” she said, noting that some insurance companies had to sell parts of their portfolio when Solvency II came into effect. Ardian’s spin-off from AXA in 2013 was due in part to tougher capital requirements brought by Solvency II, among other factors.
“For mid-level companies there will definitely be an impact because they’ve been restricted in recent years and can now go back to where they used to be or, for more recent entrants, build up a portfolio. They’re mostly existing LPs that already have teams and they can just ramp it up, so we should be able to notice that in the coming years.”