Chinese insurers study overseas PE investing

The ongoing drive of Chinese insurers to invest offshore is leading more of the companies to seek out investments into private equity, according to market experts.

As reported yesterday, China’s insurance companies are seeking advice from fund managers to raise their offshore investments as they seek to keep pace with mounting premiums and raise their offshore investments from about 2% of their total allocations today. While they most favour global real estate in the alternatives space they are targeting private equity too.

However, the insurers are not that experienced in international private equity investments. As a result they are conducting careful due diligence are prepared to initially accept an annual return rate lower than the 6% to 8% normally targeted by insurance companies, according to Fan Shengyan, managing director of the merger and acquisition at China Everbright Limited (CEL), an asset manager that primarily focuses on private equity investments.

In contrast, CEL’s guidelines target internal rates of return in the low-teens.

“Insurance companies, in our experience, are not looking for high returns but stable returns; something that can make sure there is no asset-liability mismatch in their asset management. These are the primary concerns,” said Fan, in comments made at her firm’s three-day investment conference in Qingdao at the end of October.

CEL, a subsidiary of the state-owned China Everbright Group, runs two overseas M&A funds totaling $416 million in AUM as of end June.

Fan noted that Chinese insurers’ lack of experience with private equity investing means they are asking more questions about whether the funds have a proper structure and good corporate governance, the robustness of their decision making process and their investing strategy.

Edouard Cukierman, managing director of Catalyst CEL Fund, added that initial private equity investments are likely to teach the insurers a great deal. Private equity fund managers are trying to offer them projects that have a distinct China angle to them, he added.

China Life, the biggest life insurer in China, has already invested into seven overseas private equity funds. Most have buyout and M&A strategies with a focus on US asset exposure, one of the insurer's investment managers told AsianInvestor in August. The company also bought a 2% to 5% stake in the US-based private equity firm Texas Pacific Group (TPG) for $250 million in 2014.

While Chinese insurers are looking at investment opportunities, they won't be able to make investments into a single fund that is worth more than 20% of its assets under management, according to the China Insurance Regulatory Commission (CIRC). This is a restriction that they also have to take into account, Fan noted.

Overseas interest

The interest of Chinese insurers in private equity is part of a broader focus on increasing their foreign investment exposure.

As of end 2015, Chinese insurers’ overseas investments amounted to about $36 billion, about 2% of the overall insurance asset allocations. That’s way below the regulatory limit of 15% on overseas allocations, but an increase from the 1.44%, or $24 billion at end 2014, according to CIRC data.

That is changing. In August, Ping An, the country’s second-largest insurance group, said it intended to raise its foreign asset allocation to comprise Rmb120 billion ($17.8 billion) or 7% of its portfolio by the end of this year. It then aims to further increase this to up to 10% of its AUM in the next three to five years. Others are likely to conduct similar diversification outside of China.

The companies are particularly keen to build up their offshore private equity and real estate investments. Chinese insurance companies were first allowed to invest overseas in 2004, but initially focusing on Hong Kong equities; that changed in 2012 when they were given permission to invest into real estate and private equity too.

Cao Deyun, executive vice chairman and secretary general of Insurance Asset Management Association of China, said in a public forum in Shanghai in July that public equity is the biggest asset class in the insurers’ overseas allocations, but that real estate and private equity investments are increasing so quickly they are likely surpass it.

Ongoing global market volatility is only likely to spur this interest, along with interest in asset-backed securities, he added.