Internal structure issues hinder China insurer PE allocations - AVCJ Forum

"Many executives from state-owned insurance companies only focus on investments with a short-term horizon where the returns are more visible. But that's not the case with private equity," said John Qu, vice general manager of assets management at China Reinsurance (China Re). "Investment teams, usually the company's existing employees, do not realize the importance of building a PE portfolio. They are used to investing in public markets and picking the best stocks."

Some small- to medium-sized insurance companies struggle even more with private equity allocation, Qu added.

In 2010, the China Insurance Regulatory Commission (CIRC) began to allow insurers to invest in domestic GPs. Then in October 2012, they were given the go-ahead to invest in offshore PE funds. Few have made the leap.

"To change the current situation one would basically need to restructure the ownership of these insurance companies, which is a complex issue, but now we have a favorable policy environment for this kind of reform," Qu said. "Joint-stock companies, such as Ping An Insurance and Taikang Life Insurance, would be more motivated to invest in longer term assets."

Chinese insurers are setting up alternative investment subsidiaries, covering credit assets, trust products as well as traditional private equity funds. Instead of adopting a passive asset allocation stance, they are now offering their own multi-strategy financial products.

"They are inspired by the mega asset management model that the Chinese Securities Regulatory Commission (CSRC) encourages," said Vincent Wang, managing partner at consultancy firm Promise Advisors. "There is a transition period for insurance companies shifting from fixed income investments to credit funds and private equity funds. They will get a clear understanding of the different products in the future and then they will decide where they should narrow their focus."

In terms of offshore PE investments, insurers are restricted to backing managers with a mature team, an established track record and net assets and cumulative assets under management of no less than $1 billion; the fund should also have at least $300 million of committed capital.

"Safety is a top priority for CIRC right now. Few domestic or overseas GPs qualify for investment from an insurance company," said Sammuel Zhao, a partner at Jun He Law Offices. "But the rules are evolving over time as the CIRC is becoming more market oriented. In the first half of this year, the CIRC revised and improved the rules several times and now it is drafting new guidance on new investments. We are very optimistic about insurance companies' future commitments to private equity."

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