Insurance companies may invest up to 5% of assets into private equity -- major escalation for onshore fundraising
In an exciting new development for the Chinese private equity industry, Chinese insurance companies will be officially permitted to make private equity investments, including through funds managed by third parties, when the Provisional Measures on Administration of Operation of Insurance Capital issued by the China Insurance Regulatory Commission ("CIRC") on August 5, 2010 (the "Measures"), come into effect on August 31, 2010. It is estimated that approximately RMB 200 billion (equivalent to US$29.54 billion) will be available for investment into the asset class, providing a significant boost to the Chinese private equity industry. This will also allow insurance companies diversify their premium base in line with international norms1.
Despite the blossoming of RMB funds in recent years, the lack of sufficient qualified onshore institutional investors is considered a major obstacle for the further development of the RMB funds industry. While insurance companies have long played the role of preferred investors in the global private equity funds market, this is the first time in history that Chinese insurance companies are officially allowed to invest in private equity. Previously, only a few large insurance companies were permitted to allocate a portion of their insurance funds to private equity investments, only in certain specified industries, and with approvals of CIRC, which were granted on pilot bases. After the Measures take effect, insurance companies will be permitted to invest up to 5% of their total assets (measured at the end of the prior quarter) into private equity either directly or indirectly (the cap is set at 4% if an insurance company only engages in indirect investments, such as investments through private equity funds), by themselves or through insurance assets management institutions. Unlike the previous pilot programs, which restricted private equity investments by insurance companies to only infrastructure companies and commercial banks, there is generally no restriction under the Measures on the industries of the portfolio companies except that an insurance company may not (i) invest in private equity or real estate projects that are not in line with the state's industrial policies, such as projects that are highly polluting or with uncertain expected cash flows or asset appreciation, (ii) engage directly in real estate development and construction or (iii) engage in venture capital investments.
The Measures are a welcome development for both foreign and domestic fund sponsors who are interested in fundraising in China. Given the RMB4.17 trillion balance of Chinese insurance companies as of this June2, the approximately RMB200 billion representing 5% of holdings is substantial, and the participation of these funds in private equity could dramatically expand the investor pool, making onshore fundraising much easier. Although detailed implementing rules may need to be issued by CIRC to supplement these Measures before insurance funds can substantially invest in the private equity industry, we have seen that the leading insurers in China are actively preparing for such upcoming investments, such as Ping An Insurance, China Life Insurance and China Pacific Insurance.
Other channels opened for insurance funds include bank deposit, bonds, stocks, securities investment funds, and real estate. Besides the 5% cap for private equity investments, CIRC also provides a 20% cap for unsecured corporate bonds and bonds related financing tools, 20% for stocks and stock investment funds, 10% for real estate and related financial products, and 10% for infrastructure debt investment plans. On the other hand, these Measures do not fully allow insurance funds to invest in stocks traded on ChiNext or B-shares by taking a tentative approach that other rules to be issued by CIRC should govern, and outbound investments by insurance companies are still highly regulated by CIRC through other sets of measures.
1. According to Preqin's Investor Intelligence database, insurance companies aim to allocate 3.7% of their total assets to private equity.
2. Source of data: http://www.circ.gov.cn/web/site0/tab40/i135646.htm
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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.