LONDON – Continuing the long debate as to why U.K. investors are slow to embrace private equity as an asset class, the British Venture Capital Association (BVCA), supported by the Association of British Insurers (ABI), has commissioned an independent report by the London Business School.
The report, titled “U.K. Private Equity as an Asset Class for Insurance Companies”, recommends that a working party between HM Treasury, the Financial Services Authority, the ABI and BVCA is set up in order to propose detailed modifications to the relevant insurance company regulations. The report goes on to say, “…this working group could propose changes to the current legislation that govern the tax liability computations of limited partnership investments and thus remove a key barrier to a more widespread involvement by insurers.”
Key findings of the report were that insurance company regulations leave sufficient scope for larger insurers and insurers with a high free asset ratio to invest in the asset class. However, the admissibility limits set out in the regulations act as a disincentive for smaller insurers and insurers with a low free asset ratio to invest in the asset class at an appropriate level of diversification. For these insurers, funds-of-funds would represent a substantially less risky way to participate in the asset class, although this option becomes far less attractive when calculating tax liabilities.
The report also found that the current U.K. legislation for calculating tax liabilities from capital gains creates a considerable administrative burden for those insurers that invest in venture capital and private equity via limited partnerships. The situation is magnified for insurers investing in funds-of-funds. For example, a single fund-of-funds investment could mean having to provide tax computations for each investee company of the general partnerships in which the fund-of-funds has invested, which could well reach into the hundreds. This factor, concluded the report, was likely to be the most compelling barrier to private equity investment for insurers.
In addition, the report noted that insurance companies usually run a common investment activity for both their life insurance and pensions business. Since smaller pension schemes increasingly outsource their investment management to insurers, the complications that arise during tax computations spread into areas that are not liable to taxation on capital gains.
“For those investors which are liable to taxation on capital gains, the cost of administering investments in private equity limited partnerships are substantially higher than those of investing in other alternative asset classes. If the government wants to increase institutional investment in unquoted companies, a simplification of the fiscal regime would be an obvious area of reform,” concluded Dr. Oliver Burgel, research fellow, London Business School.