In reaction to a quantitative impact study conducted at the end of 2002, EVCA has repeated its concerns about the New Basel Accord on banking supervision, which could have negative impact on the European private equity industry. The EVCA first issued a position statement on the Accord in February last year. Although the Accord is not due to be implemented until 2007 the deadline for the final draft is fast approaching.
The EVCA fears that if the Accord is introduced as it now stands it will increase the required level of regulatory capital for banks investing in private equity, jeopardising their commitment to the asset class. The association believes the current draft of the Accord does not adequately reflect the risks and the upside potential related to investing in private equity. With this in mind it has urged the Basel Committee to allow itself more time to develop a model for assessing the risks over an appropriate period of time.
An ideal model would take into account the risk factors of the underlying portfolio companies, the fund and the venture capitalist managing the fund. However, due to the degree of diversification possible this would not be feasible so the EVCA suggests a model based on the risk of specific funds.
The EIF, Fitch Ratings and Standard & Poor’s have all begun work on assessing fund risks, taking into account track record, stage focus, vintage year, geographical diversification and peer groups. The EVCA argues this research could be included in the risk analysis framework already developed by the Basel Committee. Although it also points out that this analysis does not take into account the upside of investments in private equity.
EVCA has recommended that the Committee begin a consultation with banks that have invested in private equity and the private equity industry itself. This would lead to further study of technical aspects such as different approaches to risk analysis and the commencement of a grandfathering period in 2007. See EVCJ September 2002, p36.