When the ball dropped on January 1, 2016, it triggered the launch of Solvency II, the new European regulatory framework for EU insurers.
Fund managers that consider EU insurers a significant source of fundraising capital have monitored the directive’s development for years, anticipating higher capital charges on illiquid assets to restrict insurers’ appetite for private equity and real estate funds.
In a way, that prediction has already proven true. As reported on sister title Secondaries Investor, the directive is prompting many insurance companies to conduct quarterly calculations determining their ability to sign new private equity fund commitments, or, in some cases, whether they must sell under the new framework.
Less anticipated by industry practitioners, however, is the bill’s potential impact on fund domicile selection and investor reporting. Solvency II levies a 49 percent capital charge on unlisted equities including private equity, real estate and infrastructure funds. That charge drops to 39 percent for unleveraged funds established in the European Union, incentivizing managers to begin registering funds in, for example, Luxembourg or Ireland, as opposed to, say, Jersey or Guernsey.
To be sure, many LP types will continue demanding offshore vehicles for tax and regulatory purposes, but EU managers targeting European insurers during fundraising and that managing a homogenous investor base immune from these tax and regulatory considerations may wish to capture the lower risk weighting by moving onshore.
The second hidden impact relates to reporting. Despite its completion, Solvency II remains vague on what information EU insurers are required to gather from external fund managers for reporting purposes. The uncertainty is forcing insurers to send GPs broad information requests that mimics information already provided in quarterly statements, creating a redundant reporting exercise for the shop’s back-office staff.
Solvency II is all about getting insurers “to capture a better picture on asset specific risks,” says Christian Schatz, a tax and regulatory-focused partner with KWM based in the law firm’s Munich office. As such, fund of fund managers are feeling particularly burdened. Solvency II requires insurers to “look through” their fund of fund structures to determine ultimate ownership of assets, which requires a significant amount of information gathering.
Insurance companies represent about 8 percent of alternative asset managers’ fundraising capital, according to Towers Watson, making the EU’s €8.5 trillion insurance sector a pivotal stop on many managers’ fundraising trails. But those managers that solicit capital from EU insurers will not only have to consider new risk-based capital requirements under Solvency II, but what the directive means for back-office staff
and fund domicile selection.
Photograph by Remy Steinegger