Chinese insurers are increasingly building out their in-house expertise on private equity investments but most will probably continue to rely on external managers.

Institutional interest in the asset class is growing in China, albeit from a low base, as the industry looks to alternative investments to improve returns and generate some alpha.

As of January-end, the country's insurers had established a total of 19 internally run private equity funds totalling Rmb131.31 billion ($19 billion), Liu Chuankui, deputy secretary general of the Insurance Asset Management Association of China (IAMAC), said in a report released late last week.

Although Chinese insurer interest in private equity predates 2015, when they first began setting up their own private equity funds, their appetite is picking up because they feel such investments could yet help them to optimise their asset allocations and better balance the source of their investment yields, Liu said.

The report by IAMAC, a self-regulatory body of insurers’ asset management subsidiaries, dovetails with a pledge earlier this year by CPIC Life, China's third-largest life insurer, to increase the private equity share of its Rmb1 trillion investment portfolio to a "near mid-single digit" percentage from a current "low-single digit" percentage.  

“We’ll make direct [private equity] investments as well as work with external managers,” CPIC’s group CIO Benjamin Deng said in February. “We hope to strengthen the investment by finding more investment targets, further enhancing post-investment management and exiting strategies, and working more closely with professional [private equity] managers.” 

For all that, the scale of private equity investments made with in-house expertise remains trivial compared with the Rmb16.41 trillion in total investment assets held by Chinese insurers as of December 2018. 
 
It's also small compared with their overall private equity investments. 
 
In a separate survey study conducted by IAMAC that covered 190 domestic insurers (including life, property and reinsurance business), insurers said they had 5.7% of their overall investment assets allocated in private equity as of late 2018.

And it will likely take some time before the insurers can be as proficient in the asset class as external private equity fund managers.

In that respect, they are still way behind, the Shanghai-based chief investment officer of a joint-venture insurer, told AsianInvestor.

Fund managers have sophisticated investment and incentivisation mechanisms and a lot of resources in the marketplace to source good deals – something that insurance companies lack, he added.

He is, nonetheless, upbeat about the outlook for the asset class generally, seeing it as a potential key catalyst of change as China restructures its economy and pursues new technology.

"In the last 15 years, real estate is the main alternative investment asset in China. Going forward, [private equity] should be the most important asset that can generate alpha", he said.

INTEREST FROM OVERSEAS

Overseas interest in Chinese private equity investments is also growing.

Although the Chinese private equity market is still heavily dominated by domestic investors, some market experts say it is attracting the attention of global asset owners undeterred by the ongoing trade tensions between the US and China.

There is now a greater focus on private equity in China among regional pension funds and sovereign wealth funds (SWFs), Elliott Shadforth, wealth and asset management leader for Asia Pacific at advisory firm EY, told AsianInvestor.

Pension funds and SWFs are long-term investors; they don’t just consider investments for two to five years but rather, in some cases 20 to 50 years, Shadforth noted. They are looking at the long-term trends such as the liberalisation of China's financial markets.

“It’s fair to say 2019 obviously has some challenges for investment, but if look at the short term in the last two to three years and what people look for in the next two to three years, we expect an increase in allocation in China’s private equity,” he said.

Look out for a feature story on institutional investors' private equity investments in China in the AsianInvestor Summer 2019 magazine issue in June.