China further relaxes insurance industry investment

China’s insurance regulator has increased the percent of assets insurance companies may invest in private equity to 30 percent from 25 percent as it rolls out a new set of rules. 

The move by the China Insurance Regulatory Commission (CIRC) comes as the country continues to liberalise investment in alternative assets, which ultimately encourages domestic institutional investors to allocate money to private equity.

However, private equity funds could potentially receive less money from insurers as a result of the new rules as they will now have to compete with public equities for the same capital.

Previously, insurance companies could invest 10 percent of their assets in domestic private equity funds and domestic unlisted companies, 25 percent in onshore public equities and a further 15 percent in all types of offshore investments (including offshore private or public equity, fixed income, REITs, etc).

However, under new regulations, these four categories will need to compete for the same 30 percent bucket of capital, which could mean private equity loses out.

“Assuming [insurers] would want to do something other than private equity, this probably does result in less for private equity,” Andrew Ostrognai, partner at Debevoise & Plimpton, told Private Equity International.

“If you have an insurance company that only wants to do private equity then this is probably better – it is 30 percent instead of 25 percent. But if they say they only do private equity as part of a diversified portfolio including hedge and public equities, well this gives them more allocation freedom but seems to allow less [capital to invest] overall.”

Nevertheless, the increased independence given to insurers could benefit offshore private equity funds as now they have fewer restrictions on whether their commitments go to domestic or foreign players.

However, it remains “not crystal clear” whether the whole allocation may be used for offshore investment, one industry source told PEI, adding that few insurance companies have yet to invest in offshore private equity funds.

In October 2012, the CIRC released regulations that allowed Chinese insurance companies to invest in private equity in 45 countries and regions, liberating a huge pool of untapped capital. 

China's insurance companies had assets of RMB 8.289 trillion ($1.36 trillion; €991 billion) at the end of 2013, according to Reuters, citing official government data.

PEI’s source said, “The question is how many of the insurers are actually making commitments [overseas]? Have people begun to even bump up near to the 15 percent that currently exists? We can say it is a liberalisation up to 30 [percent], but if people are only using 2 or 3 percent of their allocations, does it really matter right now?”

While insurers have expressed interest in investing in private equity overseas, many of them remain unsophisticated and do not have the resources to build investment teams that can successfully invest in overseas managers, industry sources say.

“Offshore fund documents are rather complex and frightening,” one source said. “It is really a business for very sophisticated institutional investors [that] have built up a track record and experienced teams over [many] years. It is just a huge growth process [for insurers] – to be successful you need a team with very strong English who understands offshore models. It requires building out a whole department.”

“If you’re an insurance company, you are not really resourced that way and it takes a while to build that up.”

Learn more about current regulatory changes in China during a special China-focused panel on day two of the ninth annual Private Equity International Asia Forum 2014 on 11-12 March in Hong Kong.