China: Overseas Investments In Private Equity And Real Estate By Chinese Insurance Companies

On October 12, 2012, the China Insurance Regulatory Commission (the CIRC) promulgated rules that allow Chinese insurance companies to make overseas investments (the Implementing Rules).¹

For the first time, the CIRC provided detailed guidelines and removed significant uncertainties on overseas investments by Chinese insurance companies in private equity funds (including fund of funds), private companies, real estate and real estate investment trusts (REITs) in 45 designated countries and regions (the Designated Jurisdictions, as set out in Appendix A). Other asset classes open to investment by Chinese insurance companies include money market products, fixed income products, equities and securities investment funds.

Although there are still restrictions on overseas investments by Chinese insurance companies, the fund managers in the Designated Jurisdictions are now able to tap into the large pool of capital held by Chinese insurance companies. We believe that demand from Chinese insurance companies could be significant as many seek to diversify and broaden their investment portfolios, and to gain access to world-class fund managers. According to the CIRC, the estimated amount of capital held by Chinese insurance companies was more than US$1 trillion as of September 2012.

PRIVATE EQUITY INVESTMENTS

Chinese insurance companies are permitted to invest directly in certain (a) private companies as a shareholder or (b) private equity funds as a limited partner (LP) in the Designated Jurisdictions.

Private Companies

Chinese insurance companies may only invest in private companies in the Designated Jurisdictions whose main businesses are in the following industries:

• finance
• healthcare
• resources (excluding precious metals)
• modern agriculture
• senior or elderly care
• energy
• automobile services

Private Equity Funds

Chinese insurance companies may also invest in overseas private equity funds, including fund of funds, in the Designated Jurisdictions so long as they meet certain requirements that include:

• the fund has a committed capital of not less than US$300 million, part of which must have been contributed;²
• the investment institution that sponsors and manages the fund has a paid-up capital or net asset of not less than US$15 million and a cumulative "assets under management" (AUM) of not less than US$1 billion;
• the investment institution that sponsors and manages the fund has an excellent track record and a good reputation;³
• the fund management team must have:
  
  
  • at least 10 professionals with relevant experience, with at least three of them having worked together for at least three years;
  • at least two senior managers with more than eight years of relevant experience, including a successful track record of sponsoring, managing and exiting at least five projects; and
  • a sound corporate governance structure and effective incentive plan;
    
    
• the fund has a "key man" provision in its constitution documents; and
• no financial institution controls the management of the fund or holds any general partner (GP) interests in such fund.

In addition, Chinese insurance companies may invest in private equity funds outside of the Designated Jurisdictions if such funds target portfolio companies in the growth phase, mature phase or with significant acquisition value.

REAL ESTATE INVESTMENTS

Real Estate

Chinese insurance companies may only invest in commercial and office buildings with stable returns that are located in prime locations within main cities of the Designated Jurisdictions that are deemed "developed markets" under the Implementing Rules.⁴

REITs

Chinese insurance companies may invest in REITs that are listed and traded on the stock exchanges in the Designated Jurisdictions.

OTHER ASSET CLASSES

Financial Products

Other financial products that the Chinese insurance companies may invest in include:

Securities Investment Funds

Chinese insurance companies may also invest in securities investment funds so long as such funds meet certain requirements:

• recognized or registered with securities administrative authority in the Designated Jurisdictions;
• track record of not less than three years; and
• "AAA" or equivalent ratings for money market funds.

CONCLUSION

This is a significant development. The provisions of the Implementing Rules appear less restrictive than those imposed in the past on equity investments in domestic targets by Chinese insurance companies. The lower requirements, the expanded asset classes and jurisdictions for investment, together with the strong desire by Chinese insurance companies to improve returns could potentially prompt significant overseas investments by Chinese insurance companies in the near future.

However, as with many new Chinese measures, there are ambiguities in the Implementing Rules and unanswered questions. In addition, CIRC's approval may be necessary for each significant investment, allowing the CIRC significant discretion and creating additional uncertainty in the investment process. We will continue to monitor and report such developments.

APPENDIX A – DESIGNATED JURISDICTIONS

Footnotes

1 See Implementing Rules for the Interim Administrative Measures on Overseas Investments of Insurance Funds.

2 The Implementing Rules do not specify the amount or percentage that must have been contributed.

3 The Implementing Rules do not define terms such as "excellent" and "good".

4 The Implementing Rules do not define terms such as "prime locations" and "main cities".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.