Professional investors, such as pension funds and insurers, take a long-term perspective. They invest their assets over the long-term to meet their liabilities – paying for the retirements of millions of European citizens.
This long-term investment philosophy ties in well with private equity. It gives fund managers the time and space not only to pick the right companies to back, but also to engage patiently and actively with those businesses.
While it is important for Europe to manage risks through a robust prudential framework, it is key that capital requirements for banks, insurers and pension funds do not disincentivise investment into private equity.
At the same time, environmental, social and governance (ESG) considerations are increasingly central to private equity investors and fund managers alike, and this is shaping how companies are being developed. There is a clear conviction that companies that address ESG issues can achieve better growth, cost savings and ultimately profitability, while also strengthening stakeholder relations and burnishing their reputations.
The upcoming review should tackle the current misalignment between the true risk of investing in private equity funds and the risk weight applied. Regulation should not disincentivise insurers’ investments in private equity.
Pension funds seeking to grow the pension pots of citizens saving for retirement provide about a third of all capital invested into European private equity. Therefore, it is critical to avoid imposing any new quantitative capital requirements in the Institutions for Occupational Retirement Provision (IORP) Directive that would discourage their investments.
The review of the European Long-Term Investment Fund (ELTIF) Regulation provides an opportunity to assess the uptake of the regime and to consider steps that would further enhance ELTIF’s proposition.
Private equity’s active stewardship and long-term investment model mean many private equity fund managers already have a strong focus on environmental, social and governance (ESG) consideration. As the EU continues to show leadership on sustainable finance, any new rules need to be workable, proportionate and support Europe’s wider economic aims.
Part of the capital raised by private equity comes from high-net-worth individuals, often former entrepreneurs, or other private investors who do not meet the strict, trading-orientated professional investor criteria defined in the Markets in Financial Instruments Directive (MiFID). Recognising the value and sophistication of these semi-professional investors and setting them apart from retail investors beyond the EuVECA regime – for example, by exempting them from the Key Information Document (KID) requirements – will ensure they commit more capital to growing companies through private equity.
Read more about the private equity industry's key policy priorities for 2019 to 2024 in our Manifesto.
Solvency II is a review of prudential regulation for the European insurance industry. It provides a risk measurement framework for defining capital requirements for insurance companies.
The IORP (Institutions for Occupational Retirement Provision) Directive established an EU regulatory framework for the pension sector.
In June 2013, the European Commission produced a legislative proposal for a Regulation on European Long-term Investment Funds (ELTIFs) – the first concrete output from the Commission’s work on long-term investment.
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