Private equity exposures
Content
The rules on capital requirements for exposures concerning private equity instruments are relevant for banks. In fact, in many countries banks are the main subscribers of private equity funds and direct investors in the capital of non-listed firms. A prejudicial treatment of such exposures would make these investments less convenient for banks and, consequently, would reduce the financial resources aimed at creating and developing firms, and more generally, the economic system.
Currently, the Capital Requirements Directive (CRD), in relation to IRB approach, provides a risk-weighting of 370% for private equity exposures (both direct and indirect investments of the banks). The risk-weight decreases to 190% for investments in private equity instruments within “sufficiently diversified portfolios”, even if the above-mentioned Directive does not provide such a definition.
ABI Position
ABI proposes a general reduction of risk-weighting for private equity exposures of the banks, that are set at an unduly high level. In particular, ABI underlines that an investment in private equity funds generally bears less risks due to the diversification strategies carried out by investment companies involving a team of experts (usually keeping a performance track record of past investments of the same kind).
Nonetheless it’s necessary to emphasize that the definition of diversified portfolio also becomes relevant for direct investments made by banks in the capital of unlisted firms. In fact, even in this case, specific criteria (e.g. diversification of investments or a team managing investments different from the team focused on lending) to achieve a reduction of risks are used.
Moreover, ABI is cooperating, at a national level, to identify the criteria whereby an investment portfolio in private equity can be defined as “sufficiently diversified”, both for indirect and direct investments of the banks.