PE dodges EU Volcker rule

A proposed EU rule to ban banks from making in-house market bets exempts private equity from its scope.

A proposal mirroring the US Volcker Rule working its way through the EU legislative process leaves the private equity industry untouched.

The proposed rule restricts European banks deemed to be of global systemic importance – or those exceeding certain AUM and trade thresholds – from taking market bets with their own money.

“Unleveraged and closed-ended funds – mainly private equity, venture capital and social entrepreneurship funds – are exempted from this prohibition, given their role in supporting the financing of the real economy,” the proposal said.

Industry trade body The European Private Equity and Venture Capital Association’s (EVCA) praised the carve-out.

“The EVCA welcomes this recognition, which will allow banks to continue to invest, over the long-term, in such funds and, through them, into European businesses,” said EVCA director of public affairs Michael Collins.

This exemption could be seen as something of a surprise given other proposed EU regulations set to impact private equity fundraising; specifically the Solvency II directive for EU insurers which is being replicated for EU pension plans. These regulations will require some of the industry’s biggest backers to hold more capital for private equity investments due to the asset class’ perceived risk, potentially pushing LPs away from alternatives.

However, as part of the proposals the European Commission may also require individual member states to force banks to create separate entities for trading and investment banking activities, including lending to venture capital and private equity funds, if certain thresholds (still to be determined by the European Banking Authority) are met.