With mounting concerns over the blanket risk weighting to be applied to all bank investments in private equity under Basle II, the European Venture Capital & Private Equity Association (EVCA) has commissioned a study, the findings of which indicate that the risk levels involved in private equity vary considerably depending on the investment vehicle used.
The study found that an investment through a fund-of-funds, where capital is collected from investors for investment in some 20 private equity and venture capital funds, has a 0% probability of total loss and about 1% probability of some loss.
The probability of a complete loss of capital invested via investment through a managed fund, where capital is raised from investors for investment in 10 to 20 portfolio companies in only about 1%, although the probability of some loss is around 30%.
Direct investment, whereby an investor provides capital directly to a company, is the most risky with a 30% probability of total loss and a 42% probability of some loss.
Currently Basle II proposals will move the 8% threshold applicable under Basle I to between 24% and 32% for all private equity.
EVCA commissioned the study, called “Risk profiles of private equity” by independent researchers Tom Weidig and Pierre-Yves Mathonet.