China lets insurance in

A temporary measure introduced by China’s Insurance Regulatory Commission finally allows the country’s insurance companies to invest in private equity. But is the impact on fund managers going to be all that big?

A significant step forward for China’s private equity industry came in late August when China’s Insurance Regulatory Commission (CIRC) gave Chinese insurance companies the green light to invest in the asset class.

CIRC’s temporary measure, which came into effect on 31 August, allows China-registered insurance companies to invest up to 5 percent of their latest quarter’s total assets either directly or indirectly into domestic private equity.

Though unsurprisingly the measure comes with a fair amount of small print, the news is nothing but good for China’s GPs and LPs alike.

For domestic fund managers, the most obvious plus is the creation of yet another rich vein of capital to potentially tap into on the fundraising trail. According to China-focused private equity research body Zero2IPO, the new rules mean 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.

But perhaps more significant than the capital itself, is the change the CIRC measure could bring about in the make-up of China’s domestic LP base, which until now has largely consisted of high net worth individuals (HNWIs) and government-related bodies. Not only have both groups typically brought zero prior experience of private equity fund investment to the table, but they have also come with their own strong ideas of how private equity investment should work. In the case of government-linked investors, the cash generally comes with some pretty prescriptive strings attached, while with HNWIs, there is an expectation of quick returns.

“Fundraising in China is actually not easy as there are very few mature LPs,” Wu Yibing, president of CITIC Private Equity Funds Management, said in an interview earlier this year. “Private entrepreneurs are used to investing in the stock markets. As a result of the boom in the last couple of years, it was viewed as an easy way of making money. Having managers take care of money is not a familiar concept in China.”

An influx of insurance money could, therefore, go a long way towards aiding the “institutionalisation” of China’s private equity industry – something offshore LPs have been saying is needed for some time.

However, there are some who point out that the changes wrought by the new regulation may not be as substantial as expected.

“I think it is a great that insurance capital is finally allowed to invest in private equity,” said one LP recently. “However, many insurance companies, banks and securities firms started private equity programmes three to four years ago and some have invested a substantial amount.”

Prior to the creation of the new rule, the legal standpoint was that only a handful of large Chinese insurers were allowed on a case-by-case basis by CIRC to invest a portion of their insurance funds in direct private equity investments, in selected industries such as infrastructure and banks, according to Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai. Some of the largest, like China Life and Ping An, may have also neatly side-stepped restrictions by making overseas investments from their Hong Kong-listed entities.

As such, the private equity modus operandi established by the larger insurance companies in China is that of direct investment. Ping An, for example, recently provided an exit for TPG Capital from Shenzhen Development Bank (SDB), by swapping the US firm’s16.76 percent stake in SDB for a 4 percent stake in Ping An stock.

“The institutions here would like to make strategic investments and have direct stakes in companies on their own,” CITIC Private Equity’s Wu stated in the earlier interview.

If they are to now deepen their investment in private equity, it seems unlikely they will suddenly switch to investing in funds to do this. In fact, there have been persistent reports – some denied by the insurer – since last year that Ping An, amongst other big insurers, is planning to launch its own private equity unit.

Nonetheless, there is hope that insurers at the smaller end of the scale – for whom private equity investment is new – will look to private equity funds for access to the asset class.

One firm said to be eyeing this new source of funding is TPG Capital, which announced in August the launch of two RMB-denominated funds, one each in Shanghai and Chongqing, both with targets of RMB5 billion. The timing, said several Asian private equity professionals, was unlikely to be accidental.