A shrinking pool

With European regulators examining the way banks and insurance companies interact with the private equity asset class, two important players in France’s domestic LP base are being discouraged from investing in private equity.

Research conducted last year by accountancy firm Grant Thornton in conjunction with the Association Francaise des Investisseurs en Capital (AFIC), France’s private equity and venture capital industry association, showed that during 2008 almost a quarter of money raised by French GPs came from banks. Insurance companies accounted for 18 percent of the capital committed to the asset class, while individuals and family offices made up the largest share at 24 percent.

Pension funds – a pivotal provider of private equity capital in the US and UK – accounted for just 15 percent of the total. Given that France has no pension funds to speak of, this money would likely be among the 40 percent of capital that was raised from outside the country.

One or 2 percent of this [life insurance money] would make a significant difference to French private equity. 

French GP

The importance of the insurance and banking sectors to French private equity make it a source of consternation among practitioners that the wind of regulatory change is blowing these institutions away from the asset class. “It is the big question, and the outcome is unclear,” says one mid-market GP in Paris, when asked how the future composition of the domestic LP base will look.

The draft Solvency II Directive in the EU is threatening to make private equity a more expensive asset class for insurance companies to hold (See p.51) and could ultimately encourage them to shift their allocations towards the type of liquid assets that attract lower capital requirements. Basel II and comparable regimes increasingly discourage banks and insurance companies from investing in private equity and venture capital. Meanwhile Basel III, a European accord which is not due for implementation until 2012, looks set to make it even harder for banks to own private equity assets or interests.

“In the mid-market, the banks are very present,” says one GP. “Basel III may have a significant impact on the banks and some in France see the rule as designed specifically by European colleagues to damage French banks.”

The issue exists, and the overall trend is that there is a shift in the LP base towards sovereign wealth funds and public pensions.

Amir Sharifi

Earlier this month German insurer Allianz completed the sale of AGF, its French private equity fund of funds platform – reportedly for €30 million – to IDI Group, an independent French private equity firm. Meanwhile French financial services group Natixis is on the verge of selling three of its proprietary private equity businesses to AXA Private Equity. iXEN Partners and NI Partners, two units that are currently merging, and Initiative & Finance Gestion are all on the block.

“The issue exists, and the overall trend is that there is shift in the LP base towards sovereign wealth funds and public pensions,” says Amir Sharifi, head of corporate development and communication for AXA Private Equity.

Aside from focusing more on internationally sourced capital – which is often an unrealistic exercise for smaller firms – the industry would get a huge boost if it could tap into the vast pool – estimated to be in the region of €800 billion – of life insurance (assurance vie) capital.  To date this money has not been invested in private equity, primarily because the investment horizon of life insurance commitments is too short to allow it. Life insurers need liquidity that private equity cannot give.

“One or 2 percent of this to private equity would make a significant difference to French private equity,” says one Parisian GP. Until this money can be tapped, however, French GPs will become increasingly reliant on sovereign wealth funds, overseas pensions and fund of funds capital, which in 2008 accounted for 12 percent of commitments to French private equity.