22 October 2015

Chinese insurance companies allowed to establish domestic funds: a threat or an opportunity for European managers?

As President Xi Jinping ends his four day visit to Britain, the European private equity industry might reflect on the increasing importance of China to its fund raising, investment and exit strategies. Apart from the obvious opportunities for investing and divesting offered by the world's second largest economy, attracting investment from China has been a key priority for many European funds. Chinese sovereign wealth funds, in particular, have become established as significant investors into funds and, in some cases, as major co-investors – and even strategic partners. More recently, some Chinese insurance companies have been looking to follow suit: they began investing money abroad through fund managers when the regulations changed in 2012.

However, in a further sign of increasing regulatory liberalisation, an important change last month means that Chinese insurance companies could themselves become a useful route to invest in China for international investors: the China Insurance Regulatory Commission (CIRC) issued new regulations allowing insurance companies to establish private equity funds within the People's Republic of China. That could be mixed news for European GPs.

The regulations set out the framework for insurance companies to establish funds, which can include buyout, growth, real estate, mezzanine, and venture capital strategies, as well as funds of funds. The conditions are not onerous: at least 30% of the fund's capital must come from the insurance sponsor; the management team must be formed of at least three individuals with over three years' experience in investing; and a custodian is also required. The sponsor and fund manager must both be legally separate from the insurance company, and a fund raising plan should be filed with and approved by the CIRC, who also need to be supplied with quarterly and annual reports of the fund. (Please click here for a more in depth look at the regulations.)

While the main aim of the rule-change is to broaden the investment opportunities for Chinese insurance companies, and provide much needed capital for domestic infrastructure projects and other industries, it could also open doors for international fund managers to form strategic relationships with the new-to-market managers in China, as well as offer potential co-investment opportunities into Chinese infrastructure deals, urbanisation projects and strategic emerging industries. That could offset the obvious downside: increased competition for Chinese deals for those managers already investing there. 

Of course, this change is also a potential threat for European managers – who may have been hoping to attract investment from China – if the effect is to encourage insurance companies to invest more in private equity at home, and increase competition for capital from internationally-minded LPs.  Although the rule-relaxation in 2012 took some time to have an impact, more capital has been flowing to Europe and the US from Chinese insurers in recent years (mainly to larger, brand-name funds), and some will fear that this latest move will reverse that trend. 

But European managers may also see this move as a potential opportunity, even if they only invest domestically: there is unlikely to be an immediate rush for Chinese insurers to establish funds, and these institutions might first seek to broaden their knowledge and experience in the sector by increasing their exposure to international alternative investment strategies. That could signal more, not less, investment in European buyout funds.

Larger international fund managers are already rolling out the red carpet to Chinese insurers, who now offer both the prospect of immediate capital and possible partnerships in China in the years to come. Domestic buyout fund managers might also sharpen up their marketing strategy to them, while European-based LPs should find that last month's change opens up some interesting investment opportunities for them. 

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We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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