UK Investors in Private Equity – Regulatory Pressure a Cause for Concern? - March 2014

by Harry Young

  • 26 Mar 2014
  • PE

As the impending implementation of Basel III and Solvency II gathers pace, the outlook for UK investors in the private equity space still remains decidedly vague. The regulatory standards of Basel III, applying stricter rules on the eligible capital of banks, as well as the capital adequacy requirements of insurance companies, directed by Solvency II, may be hindering the pool of capital that UK-based investors are able to allocate to private equity fund investments. 

According to Preqin’s Investor Intelligence, there are currently 389 LPs based in the UK, managing an aggregate $9.8tn in assets. Excluding fund of funds managers, the average current allocation to private equity of UK-based investors is 8.8% of total assets, with a target of 9.1%. Somewhat notably, the average current allocation has fallen from 9.8% in just seven months since August 2013. This drop may be linked to a degree of investor caution attributable to the regulation acknowledged above. 

What is also interesting is that despite the recent fall, the average allocations to private equity have in fact risen dramatically since the levels seen in 2009, when the average actual allocation to private equity was just 4.5% in the UK, with a target of 5.8%. This arguably heightens the significance of the short term recent trend, as the proposed changes in regulation appear to have reversed the pattern of the last few years. 

A survey carried out by Preqin in December 2013 found that 8% of investors asked may look to reduce their allocation to private equity in light of impending regulation. Preqin found that over a quarter (26%) of LPs believe that regulation will be a key issue in the industry in 2014. Notwithstanding, the outlook for the private equity space maintains strength on a global scale, supported by the healthy investor appetite that currently exists. Our survey results show that the majority LPs surveyed (92%) said that they are likely to maintain or increase their allocation to the private equity asset class over the longer term. 

Despite this encouraging statistic, the situation for UK-based investors is still shrouded with some uncertainty as the industry awaits further development of the proposed industry regulations. While longer term interest in the asset class has evidently risen in line with a measured economic recovery, private equity fund managers across the world will undoubtedly look to keep abreast of how proposed regulations will affect their fundraising potential from investors located in the UK.

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