In the United States, a flexible regulatory framework favors a strong integration of private equity, while in Europe, a more cautious approach hinders its growth. As a result, North America accounts for 65% of the global volume of private equity transactions, compared with just 22% in Europe 40 - an unfortunate situation for Europeans looking for profitable investments outside the stock markets.
Contrasting but structuring regulatory frameworks
In the United States, the Employee Retirement Income Security Act (ERISA), passed in 1974, imposes strict rules on asset management, fiduciary responsibility and investment diversification. It offers a degree of flexibility in investment allocation, favoring alternative investments such as private equity. This flexibility is subject to the obligation to justify appropriate investments that do not jeopardize the security of beneficiaries.
Although diverse from country to country, the European regulatory approach remains on the whole more restrictive and conservative than in the United States. The European IORP II directive, in force since 2016, proposes a stricter framework with greater transparency requirements.
Regulations such as Solvency II impose capital limits on investments in high-risk assets, including private equity. By increasing requirements to cover these risky investments, some funds are discouraged from allocating a significant proportion of their portfolio to them. This situation is holding back the growth of private equity, despite the fact that it outperforms and outstrips other asset classes in terms of returns.
The United States continues to favor private equity
The disparities between the US and Europe have intensified since 2020. The US Department of Labor then clarified the possibility for funds to integrate alternative investments to meet their fiduciary obligations to diversify. This relaxation has intensified the adoption of private equity. Thanks to greater freedom in managing allocations, US funds have more room for manoeuvre, aligned with their needs to adapt to stock market volatility.
On the other hand, Europe's stringent requirements in terms of governance, transparency and risk management make the adoption of private equity more complex. Although some jurisdictions on the old continent, such as the UK and Switzerland, are adopting a more flexible approach, the private equity boom is still in its infancy.
Towards greater flexibility in Europe?
Faced with the success of private equity in the United States, and the increasing returns associated with these investments, some European players are calling for regulatory reform. Discussions between the United States and Europe, through the ELTIF (European Long-Term Investment Funds) initiative, are currently focusing on greater harmonization and relaxation of European regulations.
Other recent initiatives have encouraged European funds to adopt more flexible approaches to investment allocation, while ensuring that they meet enhanced governance and transparency criteria. The trend is towards a strict framework, adapted to market realities. European legislators remain cautious, however, and rightly so. These issues directly affect the stability of funds and the protection of beneficiaries.
The future of private equity integration in Europe thus depends on regulators' ability to strike a balance between investor security and long-term investment opportunities. While the United States is showing that a more flexible approach is bearing fruit, Europe is moving ahead at a snail's pace, gradually paving the way for these investments.
40 https://www.allnews.ch/content/news/les-fonds-de-private-equity-investissent-%C3%A0-nouveau-massivement-dans-la-sant%C3%A9#:~:text=Au%20total%20cinq%20transactions%20ont,pour%20la%20r%C3%A9gion%20Asie%2DPacifique.
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