European Commission reduces capital charges for insurers to invest in long-term assets

New treatment of long-term equity investments under EU rules for insurers are a step towards releasing €10 trillion of capital to support European SMEs via private equity funds, says Invest Europe.

On Friday, the European Commission presented a review of its Delegated Acts on Solvency II, the Directive which governs insurance companies in Europe. The final act of this Commission’s Capital Markets Union Action Plan is the creation of a new category for long-term equity investments, which could include investments in private equity funds. The Capital Markets Union Action Plan aims to increase investment into Europe’s privately held companies to boost jobs and growth.

Insurers investing into funds that will fall under this new Solvency II category will benefit from a reduced risk-weight of 22%, allowing them to set aside less capital to manage the perceived risks of these investments.

“Private equity funds are a good fit for insurers who are looking for long-term investments and want to provide capital to European companies,” said Michael Collins, Invest Europe CEO. “Insurers are Europe’s largest institutional investor class, but still make up a relatively small proportion of European private equity fundraising — far behind pension funds, which are the asset class’s biggest contributor. The Commission’s revisions are a positive step towards addressing this, as the reduced risk-weight is more aligned with private equity’s risk profile.”

In 2017, European private equity funds raised €91.9bn, with 75% of these commitments provided by long-term investors such as pension funds, insurers and funds of funds, according to Invest Europe data. Insurance companies, whose total European investment portfolios are worth over €10 trillion*, accounted for 8% of European private equity fundraising in 2017. Meanwhile, pension funds accounted for 29% of fundraising, Invest Europe figures show. Private equity invests around €50bn a year into European companies and currently backs approximately 30,000 companies, of which 80% are SMEs.

Invest Europe is the association representing European private equity and venture capital, and their global investors. For more information, visit Invest Europe’s website, investeurope.eu.