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
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.
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
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