Financial policy (direct and indirect) effects
(2a) Financial regulation and institutional investors
The second direction of interdependencies ranges from financial policy towards innovators. Institutional investors are driven by a balanced risk-return approach to increase their assets. Their work is subject to oversight by regulators and rating agencies, which play a role in limiting and selecting certain preferable asset classes. US and European investors reported on recent developments in the regulatory environment of the financial sector aimed in general at decreasing the appetite for risk. In the aftermath of the financial crisis, several regulations targeting the banking, insurance, and investment industries were introduced or tightened. Investors argued that “there’s a lot of quite unintelligent and uninformed drive to suppress risk particularly around the EU for all sorts of different agendas" (GER11 - Venture Capital Investor). Thus the regulations influencing the financial industry at the institutional investor level—Basel III, Solvency II, the Dodd-Frank Act, and the Volcker rule —are seen as capable of limiting private equity fundraising. In the US, the regulatory changes anticipated by the Dodd-Frank act created the urge for institutional investors to divest riskier asset classes. In the CT sector, this led to a secondary market for institutional investor interests in CT funds, which were transferred to (institutional) investors with more risk taking capabilities at a discount. “The threat of that [regulations to cover capital adequacy], I think, is quite profound so if a pension fund or an insurance company needs to reserve capital differently because it invests in a higher risk asset classes, you are clearly going to do less of it" (GER11 - Venture Capital Investor). Some of the institutional investors, especially in Germany, would like to see more favorable regulation with regard to VC/PE. The possibility of diversification and higher return possibilities as well as the importance for economic development made them demand to allocate more private money in their pension plans or insurance assets in VC/PE.
In addition to the regulations, the uncertainty about anticipated regulatory changes impacts the investment behavior of institutional investors, according to investors from the US and Germany, resulting in fewer new investments in certain risky asset classes to anticipate limitations of risk. “When you have economic and regulatory uncertainty people don’t want to invest - you have a little bit of a lock up in the market" (GER10 - Private Equity Investor). Decreasing allocations of VC by prominent institutional investors provide evidence for this development (Roth, 2012).