AXA PRIVATE Equity has raised the biggest fund targeting investors looking to sell out of their buyout positions, in an effort to scoop up a flood of private equity interests being sold at a discount by banks and financial institutions.

The investment arm of the French insurance group has raised $7.1 billion from outside investors to snap up “secondaries”, deals in which it buys stakes in buyout funds such as KKR and Permira from the investors that originally backed them but are looking to cash out.

The figure – double the amount originally foreseen by Axa – is a reflection of the surge in interest from financial groups such as pension funds, insurance companies and banks to rejig or sell off their private equity positions.

Unlike hedge funds, where investors can normally redeem their money at any time, investors in buyout funds usually have to tie up their money for up to a decade. Secondary deals have flourished as investors have sought ways to exit their long-term commitments, usually accepting a small discount on the funds’ net asset values to facilitate a sale.

The trend has been driven by regulatory changes. Capital requirement rules introduced after the financial crisis have made it more expensive for banks to own illiquid and relatively risky private equity positions. In the US, the incoming Volcker rule will restrict the extent to which banks can invest on their own behalf.

As a result of such changes, BNP Paribas is looking to offload its $700 million exposure, following $1 billion-plus divestments from Bank of America Merrill Lynch, among others.

“The banks are natural sellers of private equity, and this will continue for the next two to three years,” says Vincent Gombault, head of funds at Axa.

Private equity firms, some of which are struggling to raise fresh funds, are fretting that European insurance companies may be next as they strive to meet their own amended solvency requirements.

Lansforsakringar, the Swedish banking and insurance co-operative, is in the final stages of finding buyers for its $1.5 billion portfolio of private equity holdings, and others are actively starting to examine their portfolio, industry insiders say.– (Copyright The Financial Times Limited 2012)