Do “private equity exposures in sufficiently diversified portfolios” eligible to a Risk Weight (RW) of 190% in simple risk weight approach in Article 155(2) and a PD of 65% in the PD/LGD approach in article 155(3) refer to any non-listed equity instrument and/or shares in a CIU or units in a CIU for which the underlying exposures are non-listed equity instruments, provided that they are part of a sufficiently diversified portfolio?
n order to validate the weights applicable to non-listed equity instruments, it is important to clarify the meaning of “exposures to private equity” in articles 155(2) and 155(3) under the Internal Ratings Based Approach. We understand two interpretations could be made, with the second one being the interpretation we understand is aligned with the CRR: there are different possible interpretations
1: “Private Equity” is sometimes used in English to refer to “Private Equity Funds” (i.e. CIUs for which the underlying exposures are non-listed equity instruments), which would imply that “private equity exposures in sufficiently diversified portfolios” in articles 155(2) and 155(3) would only include exposures to private equity funds.
2: “Private equity” could also be interpreted as equity instruments held privately, i.e. non-listed equity instruments. This interpretation would be in line with the CRR because:
Furthermore, the second interpretation is aligned with the treatment proposed under the Standardized approach as defined in Article 128(2)(c) for private equity investments. In Article 128, “private equity investments” refer to a high risk category in itself and, as clarified by Q&A 374, those include units or parts of a CIU for which the underlying exposures are high risk category exposures, i.e. private equity investments.
Additionally, the second interpretation is aligned with the Spanish translation of the CRR in which “private equity exposures in sufficiently diversified portfolios” in Article 155 is translated as “exposiciones de renta variable no cotizada en carteras suficientemente diversificadas”.
The notion “private equity exposures in sufficiently diversified portfolios” in Article 155(2) and 155(3) CRR does not refer to the colloquial term “private equity fund” but is rather applicable to:
i) any non-listed equity exposures;
ii) or exposures to shares or units of CIUs, for which among the underlying exposures there are non-listed equity exposures.
In both cases, in order to be eligible for the treatment set out for private equity in Article 155(2) and 155(3) CRR, the respective exposures should be part of sufficiently diversified portfolios. Furthermore, for the case under ii), the conditions set out in Article 152 CRR shall be met.