China's insurers: Safety first

Once shackled to unpredictable domestic investments, China's insurers now have license to venture overseas. As of late last year, they candabble in stocks, bonds, private equity, real estate and currency products in 45 countries and regions. It was the latest in a string of policy liberalizations by the China Insurance Regulatory Commission (CIRC). Private equity features strongly. Three years ago, insurers got the green light to participate in domestic PE as LPs. Last year, the CIRC raised the cap on their exposure to private equity funds and private companies to 10% of total assets, up from 5%. 

Fast-track approvals have also been introduced for private equity fund commitments, with the average waiting time reduced from one year to a few months. Not that the insurers are inclined to move quickly.

"As an LP, we are freer than National Council for Social Security Fund, which is limited to invest onshore funds," says an executive in the investment management department of a Chinese insurer. "But we won't focus much on offshore investment even though the regulator allows us to. The preparation work will be more complicated - we aren't familiar with overseas markets."

Baby steps

China's insurance industry had total assets of RMB7.88 trillion ($1.29 trillion) as of June this year, which means up to RMB788 billion could theoretically be pumped into private equity and direct investments. To date, insurers have committed about RMB103.5 billion to local PE funds, of which only about RMB41.5 billion is with funds that have reached a close of some kind, according to AVCJ Research.

"We are working with several insurance companies, advising on their PE investment. More than half of them slowed down their pace in investments since last year," says Sun Dayi, managing director at Jade Investments.

However, it would be unfair to say insurers are losing their appetite for private equity. Rather, the slow pace of investment is the byproduct of an uncertain regulatory environment and a lack of familiarity with the asset class.

The CIRC opened the door in 2010, announcing the registered insurers could invest, either directly or indirectly, into domestic private equity firms "with a proven track record." China Life was the first to be granted a license to conduct investments in 2011, shortly followed by Ping An Insurance and Taikang Life Insurance.

Initial progress was slow due to the amount of red tape. Investments had to be approved on a case-by-case basis and insurers were only allowed to back managers with assets under management and net assets of at least RMB3 billion and RMB100 million, respectively, as well as three exits under their belt. Only a handful of leading GPs, such as Hony Capital and CITIC Private Equity, qualified.

China Life injected RMB2 billion into CITIC Private Equity's third renminbi fund last year, accounting for about 16% of the total corpus. That came after a RMB1.5 billion commitment to Hony's second local currency vehicle.

Even though Chinese insurers have experience sourcing deals and making direct investments in private companies - Ping An's direct investment team has been in operation for more than eight years - they are not allowed to sponsor or manage a private equity funds that raise capital from third-party investors.

"We would like to be a GP, so we don't have to pay about 20% of the investment return to external managers in the form of fees," says the insurance company executive. "More income will ultimately benefit for our business growth."

The CIRC doesn't see the situation in quite the same way; its priority is risk mitigation. "It's possible the regulator views acting as a GP to a private equity fund as a high-risk business given their lack of familiarity with this asset class and the importance of safety of insurance capital," says Ying Zhang, counsel at Fangda Partners.

In this context, the CIRC has informed insurers to appoint at least two third-party consultants, including one financial advisor and one legal advisor, who can review their fund due diligence and allocations to the asset class. Firms should also ensure the funds they invest in have an investment horizon of 10 years, as opposed to the 4-5 years favored by many local managers.

Team building

Insurers are actively consulting fund-of-funds managers regarding investments and evaluating GPs; however, few decisions have been made partly because they are still building up their professional investment teams domestically and internationally. This might involve creating a specialized PE group or broadening the remit of existing asset management teams.

"Insurance companies have experience investing in fixed income and equities overseas," says Jade Invest's Sun. "Who should make foreign PE investments remains to be defined, however. It takes time for management to figure out whether it should be the current private equity team or overseas team."

AVCJ understands that China Life set up an alternative investment team earlier this year, which is separate from its asset management department.

As for direct investment in private companies, the list of approved categories now includes energy and resources, property and casualty and auto insurance, as well as financial services. They are drawn towards larger-ticket deals that offer stable, infrastructure-style returns.

No insurer is anywhere near the 10% of total assets investment threshold, according to industry sources. There is a prevailing sense of caution, particularly given the difficulties China Investment Corporation ran into with its initial direct investments.

"Given the personnel and sophistication required to go into the offshore alternative asset class, Chinese companies will take their time," says Fangda's Zhang. "However, the types of business and legal diligence questions we get from insurance LPs suggest they are becoming more sophisticated. They are learning fast and ramping up the infrastructure for offshore investments."

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• Topics
• LPs
• Greater China
• CIRC
• LPs
• China
• Jade Alternative Investment Advisors