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Under the new rules - part of the wide ranging Solvency II capital reforms - unlisted private equity will sit under the “other equities” umbrella group which is currently allocated a “shock buffer” of 49 per cent, meaning that for every €100 invested the firm would be required to hold up to €49 of capital against that investment.
Many in the private equity industry would prefer that instead of a set formula, the commission should take into account other factors such as where the private equity firm is based and what they invest in. But the commission appears to reject a more flexible approach. In a statement to Financial News, the commission said: “Solvency II is a risk-based regime and the commission considers it more appropriate to base calibrations on the risks inherent in different products rather than their country of origin”. The final decision on how to calculate the investment formula has yet to be made, the statement said.
The commission has decided to make a distinction between investment in publicly listed and privately held private equity firms. Listed private equity investments will come under the "listed equities" umbrella, which carries a significantly lower “shock buffer” of 39 per cent.
In the face of considerable industry opposition, the commission remains adamant that all firms listed in a jurisdiction within the European Economic Area will fall within that category and thus be a cheaper investment prospect for insurers.
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