CIRC strengthens oversight of PE investments

Chinese regulator CIRC has issued a circular calling for insurers to review the impact private equity investments have on their ‘solvency and overall returns’.

China’s insurance regulator has issued guidelines for insurers investing, or looking to invest in private equity, with a view to intensify supervision on the major investments of insurers.

Chinese insurers navigating the private equity landscape have been told to review the impact private equity investments have on their “solvency and returns”, as well as to enhance internal management systems to guard against insider trading, according to a China Insurance Regulatory Commission (CIRC) circular.

In addition, senior executives of insurance companies who hold stakes in private equity firms cannot be involved in the firms’ investment decisions. GPs backed by Chinese insurers also need to hire external advisory firms for project review, investment decision-making, and risk and asset management.

The new guidelines are in line with the CIRC’s heightened scrutiny on insurance companies’ investments.

Earlier this month, Chen Wenhui, vice chairman of CIRC urged insurance companies to take precautions against risks. “Most traditional large and medium insurance companies keep risks under control, while for some radical firms hidden risks loom large as they experienced surprisingly fast business expansion in recent years,” Chen said in an interview with local media.

Adeline Tan, head of advisory, Hong Kong at Mercer, tells Private Equity International, that the latest guidelines won’t be a huge change in the governance of Chinese insurers, especially as it pertains to internal management.

“The smaller insurers, however, may be more impacted in having to use external independent providers, as they are typically less accustomed to outsourcing and may have to consider their framework for identifying, selecting and appointing external parties,” Tan says. “They may also have to consider how to collaborate with these providers to achieve their end objective and demonstrate adherence to CIRC’s guidelines.

“In addition, the involvement of third parties may also force a rethink of their investment decision-making process and care is needed if the advice received or the advisor experience does not meet expectations.”

Tan also notes that working with third party advisors could potentially yield new opportunities and partnerships for the domestic GP while leading to some constructive changes in the industry. “The GPs may have different approaches on whether to utilise one firm for all solutions or focus on specialists. It would be useful to see how this aspect may lead to development of competitive advantage and differentiation for the GPs,” she adds.

Alternative investments made up 36 percent of Chinese insurers’ investments, which totalled 13.4 trillion yuan ($2 trillion; €1.7 trillion), at the end of 2016, according to data from research and consulting firm Cerulli Associates.

Chinese insurers have been drawn to alternatives ever since the CIRC lifted the industry’s investment restrictions in 2012 and raised the investment ceiling to up to 30 percent of total assets in 2014. Then in September 2015, the regulator allowed insurers to set up private equity funds as long as they invest in industries deemed a national priority, such as infrastructure, healthcare, technology and biotech.

China Life Insurance Company, the country’s biggest insurer is looking to invest up to five percent of its 2.4 trillion yuan ($357 billion; €325 billion) in private equity. China Life has made commitments to funds managed by Hony Capital and CITIC Capital Partners, according to PEI data.

Shenzhen-headquartered Ping An Insurance on the other hand has backed UOB Venture Management’s 100 billion yuan Sino-Singapore Private Equity Fund, which targets companies in Chongqing and South-East Asia. In December last year Ping An’s asset management arm also started working with the Queensland Investment Corporation to pursue cross-border deals.

Meanwhile Beijing-based Anbang Insurance Group, whose total assets reached 1.45 trillion yuan as of end-2015, gained prominence for its high-profile global acquisitions. It has invested $1 billion in South Korea’s Tongyang Life Insurance, $1.95 billion for New York’s Waldorf Astoria hotel and $6.5 billion for acquisition of Strategic Hotels & Resorts from Blackstone.