Private equity: the necessary complement to banking in Europe

As the CEO of Invest Europe – the association representing 650 members across Europe, from small venture capital fund managers to large buy-out firms and infrastructure fund managers - I participated in a panel discussion that explored the evolving relationship between banks and non-banking financial institutions (NBFIs) and implications for the stability of the global financial system.

The European private equity and venture capital industry manages €1.15 trillion in assets. In 2022, 27,645 European companies received backing from PE and VC across various industry sectors and regions. These backed companies employed 10.9 million people across Europe, accounting for 5% of the region's workforce, and created 451,511 jobs in 2022, reflecting a 7.2% increase—significantly outpacing the 2% growth rate of all European businesses.

Private equity plays a crucial role as a complementary force to banks. Our sector specialises in making long-term, active equity investments in businesses—opportunities that banks, as lenders, typically do not pursue and arguably should not. This distinction highlights the unique contributions of private equity in fostering innovation and growth.

Interaction channels between banks and private equity

The interaction between private equity and banks occurs primarily through two channels:

• Investment opportunities: Private equity funds present an avenue for banks to indirectly invest in EU growth. However, current prudential frameworks have largely disincentivized banks from becoming investors in this space, resulting in banks contributing less than 5% of overall private equity fundraising.
• Lending services: Banks can provide essential lending services to the portfolio companies in which private equity funds invest. This collaboration enhances the financial support available to businesses while maintaining the distinct roles of each sector.

Risk profile of private equity

It is worth noting that private equity funds rarely use leverage at the fund level and do not engage in derivative trading. Consequently, the risk posed by private equity from a financial stability perspective is minimal. There is also clear evidence that private equity firms continue to offer strong support to portfolio companies during periods of economic stress, serving as a stabilising force in the financial ecosystem.

Balancing regulation and competitiveness

Our discussions also highlighted the need for a balanced approach between regulatory frameworks and competitiveness. While regulation is essential for maintaining financial stability, an overemphasis on restrictions could hinder growth, which remains a core financial stability risk within the EU.

I extend my sincere thanks to the organisers and participants for the lively and informative exchanges at this event. Engaging in these discussions is vital as we navigate the complexities of our financial landscape and explore how banks and NBFIs can work together for a more resilient future.