CIRC seeks to spur best practice in PE investment

Jul 20, 2017

China's insurance regulator has issued additional guidelines around private equity investment by insurers, as they build exposure to the asset class, both as GPs and LPs.

CIRC seeks to spur best practice in PE investment

China’s insurance watchdog has moved to further strengthen risk management around private equity funds that insurance firms run or invest in, as part of a push to encourage professionalism and best practice in the industry.

The China Insurance Regulatory Commission issued additional guidelines in this area (see box), reported state publication Shanghai Securities News yesterday.

This is the CIRC's first such circular since allowing insurance asset managers to set up PE funds in September 2015, when it set out its initial guidelines.

It comes as mainland insurers continue to ramp up their allocations to private equity and as the regulator has sought to target over-aggressive selling practices.

Cao Deyun, executive vice chairman and secretary general of the Insurance Asset Management Association of China (IAMAC), told AsianInvestor that the CIRC's measures were designed to encourage healthier development of the insurance industry.

CIRC didn’t respond to a request for comment by press time.

New requirements

The new CIRC guidelines set out five main requirements, covering activities by insurance firms acting as both general partners (managers of the PE funds) and limited partners (investors in PE funds):

Insurance-backed GPs should hire external institutions to provide professional services including project review, investment decision-making, risk management and asset custody;
insurance LPs should carefully review the impact of PE fund investments on their solvency and returns;
insurance LPs should enhance their internal management to prevent insider trading or front-running;
insurance LPs must report major events to the CIRC in a timely manner; and
if senior executives of insurance companies hold stakes in the GPs, they cannot participate in the funds’ investment decisions.

The watchdog's new guidelines reflect a wider push. At the National Financial Works Conference last week in Beijing, Chinese officials emphasised their commitment to tighter regulation to contain financial risks. The event tends to set the tone for financial policy over the next five years, said Fitch Ratings yestserday.

Insurers’ steady shift into PE

Chinese insurance firms are steadily moving into the private equity space. According to a report published by IAMAC last week, 11 insurance asset managers had set up PE fund arms as of end-2016.

Most of the firms the insurance PE funds invest in are in insurance-related sectors such as elderly care, healthcare and medical care, Cao told AsianInvestor. He was unable to provide the company names by press time.

Chinese insurers have been allowed to invest in private markets since 2006. They could initially only allocate to infrastructure projects and commercial bank equity. The range of assets was expanded to include broader private equity in 2010, either directly or via PE funds.

In August 2014, the State Council issued proposals to help the insurance industry develop, which included encouraging insurers to set up PE funds. This was a breakthrough, as insurers had not been previously allowed to act as general partners (GPs), or PE fund managers.

As part of a trial phase, CIRC approved Sun Life Everbright Asset Management to set up the first PE fund in December 2014 and then gave Sunshine Asset Management the green light in January 2015.

In the initial guidelines, CIRC said insurers’ PE investment should be into key areas and industries that Beijing wants to support, such as technology firms, small and medium-sized companies, elderly care, health and medical care, and internet finance.