China insurers may avoid PE funds, despite incentives

Chinese insurer interest in private equity funds could remain muted even though the country is relaxing rules to stimulate greater investment in them and the sector is cleaning up its act.

The potential benefits if insurers invested more in these funds were highlighted last week by a senior official of the Insurance Asset Management Association of China (IAMAC), a self-regulatory body of insurers’ asset management subsidiaries.

Encouraged by official moves to ease restrictions on private equity investments, Liu Chuankui, IAMAC's deputy secretary general, said life insurers would be able to optimise their asset allocations, improve their yields and better diversify their risks by investing in them.

Speaking at a private equity event in Beijing on December 28, he also pointed to the broader economic benefits to China if insurers indirectly met the financing needs of the country's startups and its small and medium-sized enterprises by investing in private equity funds.

Insurers have long-term investment horizons and can support long-term investment projects. Meanwhile, asset managers have been increasing their alternative investments in recent years. So there is obviously scope for further collaboration between insurance funds and private equity funds, he said, according to a report in the Securities Daily. 

There are now more than 100 insurance institutions with investments in over 120 private equity investment fund management companies and over 230 individual funds. The accumulated investment exceeds Rmb500 billion ($72.8 billion), Liu said.

According to the China Banking and Insurance Regulatory Commission (CBIRC), insurance companies had Rmb16.03 trillion of investment assets as of end-November 2018, which means they had a roughly 3% allocation in private equity funds.

NOT ENOUGH INCENTIVE

In a consultation paper released in late October, the CBRIC said the cap for insurer investing into a single private equity fund would be lifted to 30% of the fund's scale from 20%.

CBIRC also said it planned to lower the risk charge for direct private equity investments into industries supported by the government, as well as for infrastructure projects and debt-for-equity swaps.

Some market participants believed the proposed new rules would spur a private equity spree for Chinese insurers.

However, Terrence Wong, a director in insurance ratings at Fitch Ratings, thinks the relaxed rules are unlikely to push insurers into investing a lot more into private equity funds.

“Insurance companies’ allocation in 'other investments' — which mainly include alternatives such as infrastructure debt plans, policy loans, or trust products — is about 40% already. It’s unlikely that they will further increase the investments in alternatives significantly,” he told AsianInvestor.

Chinese insurers’ 'other investments' (that is, alternatives) have increased steadily in the past few years, although the growth moderated during 2018 when they fell slightly as a percentage of total investment funds (see table).

Wong added that capital charges for other types of alternative assets are generally lower than that for private equity funds.

And even if insurers want to invest more in private equity, they have the option of doing so directly through long-term equity investments (defined as listed and unlisted stakes large enough to secure a board seat and take part in the company’s direction) rather than indirectly, via private equity funds, Wong noted.

The capital charge for the former is also lower under the current solvency regime, he added.

IAMAC did not immediately respond to AsianInvestor's request for further comment.

MARKET SHAKEOUT

For all that, private equity funds in China have been overhauled in the past year to make them fitter for purpose.

Last January, the Chinese authorities banned private investment funds from investing in loans or loan-like assets in a move to give institutional investors more control over risk and improve the asset management industry.

And to ensure these funds stuck to the script — that is, investment — vehicles designed to lend would no longer be processed, said the Asset Management Association of China (AMAC), a self-regulatory organisation under the aegis of the China Securities Regulatory Commission.

A large number of private equity fund offerings were subsequently terminated. In the six months until October last year, 114 Chinese private equity funds closed down, according to AMAC data.

Jimmy Leong, managing director, Asia of Singapore-based private equity fund administrator Augentius, said that the Chinese private equity market is going through a major transition last year and that many domestic funds have disappeared.

The new rules aimed to enforce global operating standards and reinforce that private funds should conform to conventional asset management models, as opposed to the many that are really P2P lending businesses or even Ponzi schemes, he said.