French firms fear domestic LP squeeze

Banks and insurers – two significant players in the domestic French LP base – are being pulled away from asset class.

French private equity firms are facing a fundraising headache as important domestic LP groups deal with current and pending regulation. European regulators are examining the way in which banks and insurance companies – two types of institution most prominent among French LPs – interact with the asset class.

The draft Solvency II Directive in the EU is threatening to make private equity a more expensive asset class for insurance companies to hold and could ultimately encourage them to shift their allocations towards the type of liquid assets that attract lower capital requirements. Meanwhile Basel III, a European accord which is not due for implementation until 2012, looks set to make it even harder for banks to own private equity assets or interests.

In 2008, banks and insurers accounted for more than 40 percent of the money raised by French GPs, according to a report compiled by accountancy group Grant Thornton.

“In the mid-market, the banks are very present,”one Parisian GP told sister publication Private Equity International. “Basel III may have a significant impact on the banks and some in France see the rule as designed specifically by European colleagues to damage French banks.”

Meanwhile, one huge potential source of LP capital remains untapped. French life insurance companies currently manage an estimated €800 billion. This money has yet to be tapped by private equity fundraisers for a number of reasons. Certain rules imposed upon insurers by ACAM, the French insurance industry association, have been “very strict” in determining how money can be invested, said Sonia Trocmé-Le Page, co-founder and partner of placement agency Global Private Equity. “That said, rules are under review, and also subject to interpretation,” she said.

PEI subscribers can read more about the shrinking French LP pool here.