Basle II risks weightings for PE under scrutiny

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.