LP interview: China Reinsurance

Chinese insurers recieved the green light to invest in offshore private equity and real estate funds in October 2012. Progress since then has been tentative. China Reinsurance was the first to make the jump, committing $30 million to KKR's North America Fund XI, which reached a final close of $8.3 billion in October 2013.

KKR remains the sole offshore manager in China Re's portfolio; the other five are domestic. Reputation, longevity and track record featured prominently in the selection criteria.

"It's more difficult for us to select overseas GPs because we don't know much about them and it is not as easy to communicate with them as with domestic managers," says John Qu, vice general manager of asset management at China Re. "When we looked at previous KKR vehicles in the same series, there were virtually no losses. Performance might not be as strong as some others, but returns have been very stable."

The insurer's allocation to offshore GPs is limited, with $100-200 million earmarked for deployment over the next two years. As a result there is a bias towards bigger funds. KKR got the nod in the US and similar criteria will be used to vet larger managers in Europe. There are plans to invest via fund-of-funds to get mid-market exposure, while secondaries and co-investment are also on the agenda.

Expansion plans

China Re originated from the People's Insurance Company of China (PICC) and remains the country's only state-controlled reinsurer. It is jointly owned by the Ministry of Finance and Central Huijin Investment Corporation, which is a unit of China Investment Corporation.

The firm set up a two-man alternative investment team in 2011, one year after the insurance industry was allowed to invest in domestic private equity funds. At the time there was so much red tape - the regulator had to approve each investment and only managers with a certain sum in assets under management could be considered - that only around 10 leading GPs qualified.

The system continues to liberalize. In 2012, the cap on insurers' exposure to PE funds and private companies was raised to 10% from 5% and earlier this year it was decreed that investments in public and private equities could account for 30% of the total assets. China Re's involvement has increased accordingly. A total of RMB1 billion ($160 million) has been deployed in private equity out of a total investment pool of RMB120 billion. The alternatives team, which covers private equity and real assets, now numbers 12.

"Under the new rules, over 50 Chinese GPs now qualify for investment by insurers," says Qu.

Insurers must appoint at least two third-party consultants, including one financial advisor and one legal advisor, to review fund due diligence and asset allocation. On the domestic front, the goal is to establish a diversified portfolio encompassing different strategies, with commitments of RMB100-300 million per fund. GPs are expected to contribute at least 5%, and sometimes up to 10%, of the corpus to ensure an alignment of interests.

"I wouldn't require the same size commitment from an overseas GP that has been in the market long enough to convince me that it can execute its strategy," Qu explains.

"China's private equity industry is just at its beginning. The GPs that have been around longest may have just 10 years of history. At this stage, it is hard for us to identify which ones are the best."

JD Capital, formerly known as Jiuding Capital, is the youngest GP in China Re's portfolio. The private equity firm, which made its name as a pre-IPO investor, reached a first close of RMB1 billion on its latest renminbi-denominated vehicle - Jiuding Strategic Fund - in November. The full target is up to RMB3 billion and China Re has put in RMB200 million.

"Jiuding is a special and localized GP, although there have been a lot of negative comments about its pre-IPO strategy. Few people try to understand the investment rationale and put into a broader context - why a pre-IPO strategy worked in China years ago and Jiuding executed it better than the others. A lot of renminbi funds made pre-IPO investments at that time, but not as successfully as Jiuding," Qu says.

He adds that JD has now modified its approach to place greater emphasis on post-investment operational involvement as well as becoming more sector specialized. The firm has a total headcount of around 300 and deal-sourcing capabilities in almost every Chinese city. Whereas a lot of private equity firms are run by 2-3 investment professionals and deals come from third parties, "90% of Jiuding's deals are sourced proprietarily," Qu says.

Spin-out some day?

The other four domestic managers in China Re's portfolio are generalist and tend to focus on later-stage investments. As it stands, insurers are barred from investing in venture capital but China Re plans to look at growth stage or even early stage private equity.

The group's ultimate aim is to establish itself as a fund-of-funds, following in the footsteps of overseas counterparts HarbourVest Partners, which was originally a subsidiary of John Hancock Insurance; or Ardian, known as Axa Private Equity until its spin-out from Axa Group last year.

"In the initial stage we will be a LP and then partner with GPs to co-invest in some deals. When our investment team is better-equipped, we expect to make some direct investments into portfolio companies," Qu says. "However, direct investment will not be our core business; our main job is seeking out the best fund managers."

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• Topics
• Greater China
• LPs
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• China
• insurance
• LPs
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