A flat 22 per cent, untouched by the symmetric adjustment, turns the private equity fund from third in the mandate into first.
A qualifying long-term equity investment is charged a flat 22 per cent under the Solvency II standard formula, against 49 per cent for type 2 equity and 39 per cent for type 1. On an illustrative 150.0m private equity allocation that is 33.0m of capital instead of 73.5m, 40.5m saved, and the fund's return on capital rises from 23.47 to 52.27 per cent: enough to take it from third place in a four-fund mandate to first.
Worked in full in Insurance Capital for Asset Managers by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Long-term equity status is the largest lever an equity manager controls in an insurer's capital calculation, and the least often priced. The charge is a fixed number, so the arithmetic is short. What takes work is seeing what the saving does to the ranking an investment committee actually uses.
| Input | Value |
|---|---|
| Allocation | 150.0m |
| Expected return, net of the manager's fees | 11.50% |
| Type 2 equity charge, symmetric adjustment at zero | 49% |
| Type 1 equity charge (listed EEA/OECD equity, or a closed-ended unleveraged EU AIF) | 39% |
| Long-term equity investment charge, no symmetric adjustment | 22% |
| Best rival in the mandate: private credit fund, return / charge | 8.90% / 18.90% |
Capital = allocation × charge
Type 2: 150.0 × 49% = 73.5m. Long-term equity: 150.0 × 22% = 33.0m. Saved: 40.5m, 27 points.
Return on capital = expected return ÷ charge
Type 2: 11.50% ÷ 49% = 23.47%. Long-term equity: 11.50% ÷ 22% = 52.27%.
In Excel: =Size*IF(LTE,0.22,0.49+SA) for the capital, and =Return/IF(LTE,0.22,0.49+SA) for the ratio. The income, 17.25m a year, does not change; only the denominator does.
Two features make the 22 per cent different from every other equity charge. It is fixed: the symmetric adjustment, which moves type 1 and type 2 by up to 10 points either way with the equity market, does not apply to it. And it is an alternative, not an addition. A holding charged as long-term equity cannot also take the 30 per cent qualifying infrastructure charge; the insurer picks one route per position.
| Fund | Return | Charge | Return on capital |
|---|---|---|---|
| Private equity, long-term equity | 11.50% | 22% | 52.27% |
| Private credit, looked through | 8.90% | 18.90% | 47.09% |
| Private equity, qualifying infrastructure | 11.50% | 30% | 38.33% |
| Private equity, type 1 | 11.50% | 39% | 29.49% |
| Direct real estate | 6.80% | 25% | 27.20% |
| Private equity, type 2 | 11.50% | 49% | 23.47% |
| Listed equity, type 1 | 7.20% | 39% | 18.46% |
Charged as type 2, the private equity fund trails both credit and real estate. Charged as long-term equity, it overtakes the credit fund, 52.27 against 47.09 per cent, with no change in its portfolio, its fees or its return. Put the other way round: under long-term equity treatment the fund could give up 6.34 points of return, falling to 5.16 per cent, and still earn the 23.47 per cent on capital it earns as type 2. No fee negotiation is worth that much.
The capital also has a use. The 40.5m freed would carry 214.3m of the credit fund at its 18.90 per cent charge, earning 19.07m a year, which is more than the private equity allocation itself earns.
| Symmetric adjustment | Type 2 charge | Type 2 capital | LTE capital | Saving |
|---|---|---|---|---|
| −10 points | 39% | 58.5m | 33.0m | 25.5m |
| −5 points | 44% | 66.0m | 33.0m | 33.0m |
| 0 | 49% | 73.5m | 33.0m | 40.5m |
| +5 points | 54% | 81.0m | 33.0m | 48.0m |
| +10 points | 59% | 88.5m | 33.0m | 55.5m |
Because the 22 per cent does not move, the status is worth most after a rally, when the adjustment is positive, and least after a fall. Its value ranges from 25.5m to 55.5m on the same holding. An insurer that assesses the lever at today's adjustment is assessing one point of a range.
Qualification is often partial, since only the part of a portfolio that meets the conditions takes the lower charge. With half the allocation qualifying, the blended charge is 35.50 per cent and the return on capital 32.39 per cent; at three quarters, 28.75 and 40.00.
The type 2 and type 1 charges move with the market as shown in how the symmetric adjustment changes a Solvency II equity charge, and the full four-fund ranking is built in return on Solvency II capital for a fund.
Long-term equity capital = allocation × 22 per cent, with no symmetric adjustment: 33.0m on 150.0m, 40.5m less than type 2. Divide the return by it before the pitch, because 52.27 per cent on capital changes the order of the mandate. Every lever a manager controls, ranked in euros on one allocation, is in the free workbooks for this case.
No. The long-term equity charge is a fixed 22 per cent. Type 1 and type 2 equity move with the symmetric adjustment within 10 points either way, so on a 150.0 million holding the saving from long-term status ranges from 25.5 million at an adjustment of minus 10 points to 55.5 million at plus 10.
It can, but the designation is made by the insurer, not the fund: the holding must sit in an identified sub-portfolio held on average for more than five years, assigned to obligations, with the ability to avoid forced sales for ten years. Where it qualifies, an 11.50 per cent fund earns 52.27 per cent on its 22 per cent charge.
On the same holding, yes: 22 per cent against 30 per cent plus 77 per cent of the symmetric adjustment. On 150.0 million that is 33.0 million against 45.0 million of capital at an adjustment of zero. The two cannot be combined; the insurer chooses one treatment per position.
This article is one calculation from Insurance Capital for Asset Managers. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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