China allows insurance firms to enter private equity

A temporary measure from the CIRC has lifted the restrictions on China’s insurance industry, allowing up to RMB226 billion in assets access to the local private equity industry for the first time.

China’s Insurance Regulatory Commission (CIRC) has announced a temporary measure on the use of insurance capital which will allow insurance companies to invest directly into unlisted firms and into private equity funds from 31 August.

The measure, which has been on the table for months if not years, marks an important milestone in the development and “institutionalisation” of China’s private equity industry.

It allows China-registered insurance companies to invest no higher than 5 percent of their latest quarter’s total assets either directly or indirectly into domestic private equity. While they can invest their full 5 percent allocation into China-registered unlisted companies, if they choose to go down the fund investment route, they can commit no higher than 4 percent of total assets to China-registered private equity funds.

According to China-focused private equity research body Zero2IPO, this means as much as RMB226 billion (€26.2 billion; $33.2 billion) would be allowed to enter China’s private equity market, given total Chinese insurance industry assets stood at RMB4.52 trillion at the end of June this year.

However, it’s not a green light for all types of private equity: investment in venture capital funds or early-stage unlisted firms is still prohibited under the measure, although the CIRC has not yet provided a clear definition of “early-stage”. According to a researcher at Zero2IPO, the restrictions on venture investment remain to control risk, given that insurance funds don't aim to seek high returns, but “a reasonable asset-liability ratio and stable value maintenance and appreciation”.

In addition, the researcher added, insurance companies will still need to go through the CIRC and National Development and Reform Commission (NDRC) in order to gain approval on their investments in the private market.

At this stage, the temporary measure leaves many unanswered questions and it’s unclear when more specific regulations regarding implementation will come out. Nonetheless, it is a huge step forward. With their substantial assets under management and long investment cycle, international insurance funds have been a substantial and stable part of the investor base in most private equity markets.