FRANCE - The application of Solvency II capital rules to pension funds would deeply impact investment in French private equity, local pension schemes have warned.

The caveat comes after the Inspection Générale des Finances (IGF) said in a recent report that private investment in French small and medium-sized enterprises (SMEs) was insufficient.

The report, published in June, argued that the current capital investment structure was only suitable for SMEs with very high growth potential, as investors have strict performance expectations when it comes to return on investment. 

According to Charles Vaquier, chief executive at pensions provider UMR, French schemes could be forced to provide as much as 65% of the capital for each private equity investment were Solvency II applied to pension funds.

"In the past, we faced difficulties to find non-listed companies to invest in due to their cost and the unsatisfying EBIDTA," Vaquier said. "But the situation has changed in recent years. Pension funds now find a good pipeline of opportunities in France, with some private equity firms providing higher returns on investment than listed companies."

But Solvency II could curb institutional investors' appetite for private equity, he said, while the capital requirements stemming from Basel III meant banks were largely unwilling to provide funds for such companies.

Michel Denizot, international activities director at AG2R La Mondiale, added: "With Solvency II, many insurance companies have already reduced their exposure to private equity due to the costs and liquidity risk involved."

Some local schemes are now seeking to increase their allocation to the asset class.

"UMR currently invest 4% in private equity through funds, mainly in France," Vaquier said. "Because most French pension funds have already complied with Solvency I, their allocation to alternative assets in general is limited at 10%.

"The positive news with Solvency II comes directly from the fact that such a limit will not be applicable, and we could therefore increase our allocation to private equity to between 5% and 10%."

The public financing institution, Caisse des Dépots et Consignations, is currently studying the option of launching a private equity fund and is in talks with several French pension to secure investment.

Vaquier said UMR would agree to provide €20m-30m to the new fund, as "it is the role of local pension funds to help the real economy to grow".

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