With a view to further regulating equity investment with insurance capital, the China Banking and Insurance Regulatory Commission revised the Interim Measures for the Investment of Insurance Capital in Equity and issued the Administrative Measures for the Equity Investment with Insurance Capital (Draft for Comments) in October 2018, seeking comments from the public.
Since the second half of 2018, domestic PE/VC funds have encountered difficulties in raising funds. The draft, however, undoubtedly brings PE/VC funds major benefits. Although the draft has yet to be officially implemented, it has at least released a clear regulatory spirit into the market that the threshold for PE/VC funds to attract insurance funds will be hopefully lowered to a certain extent. In light of relevant provisions, this column looks at several issues requiring attention in the course of bringing in insurance capital by PE/VC funds.
Qualification conditions of the target enterprise. With respect to the selection of the target enterprise, the draft deletes the requirement that a target enterprise shall not have a connected relationship with the insurance company, only preserving the stringent restriction that the target enterprise shall not have a connected relationship with the investment institution and professional firms. That is to say that, the target enterprise may not have a connected relationship with either the investment institution or the professional firms, which also applies to the equity investment of insurance capital to the insurance enterprises.
As a key point of the current revisions, the draft establishes a “positive guidance + negative list” mechanism, which grants greater discretion for the investment of insurance capital by expressly specifying the principles and the baseline.
The draft also deletes the restrictions on the investment of insurance capital in venture capital funds and risk investment funds, as well as those on using insurance capital to establish an investment institution or participate in an investment institution in the form of equity investment. It harmonizes with the regulations on the investment of insurance capital in venture capital funds and the establishment of insurance private investment funds that were implemented after the interim measures. Accordingly, when a PE/VC fund wishes to bring in insurance capital, its target enterprise shall not have a connected relationship with the fund’s investment institution and professional firms, and the investment targets shall not be included in the negative list.
Qualification requirements of the investment institution. With respect to an investment institution, the draft deletes the interim measures’ restriction on “sponsoring, establishing and managing the fund in question”, and adds the requirement that registration of the private equity fund manager shall be completed. Considering the relatively common existence in the market of a structure where the general partner and manager are separate, i.e., the entity that sponsors and establishes a fund (usually the general partner) and the entity that manages the fund (usually the manager) are not the same, the draft expressly states that the “investment institution” refers to the fund manager.
Furthermore, the draft leaves the other requirements in respect of the investment institution contained in the interim measures unchanged. Accordingly, when bringing in insurance capital, a PE/VC fund is required to ensure that its fund manager has obtained fund manager qualifications and satisfied the requirements that its registered capital or paid-in capital shall not be less than RMB100 million (US$14.8 million).
Additionally, the fund manager shall ensure it has satisfied the requirements on the number of persons in the management team, the relevant experience, and the balance of assets under its management, which shall not be less than RMB3 billion, making the requirements in respect of the fund manager itself relatively stringent.
Requirements in respect of the insurance capital investing entity. The draft, as compared with the interim measures, places new requirements on the investment entity insurance capital investing entity that indirectly invests in equity, including requirements that the investment entity shall have been established for at least one year and the insurance company’s net assets shall not be less than RMB100 million. Accordingly, when a PE/VC fund brings in insurance capital, it needs to pay attention to the insurance investment entity’s establishment date, net assets and the staff of its asset management department.
In addition to the three issues mentioned, the draft makes revisions to matters such as the investment target equity fund, investment rules, investment percentage restrictions, and regular reports, all of which will have substantial impacts on bringing in insurance capital by PE/VC funds. However, due to space constraints, details cannot be explained in this article.
For PE/VC firms, insurance capital has always been one of the key fund sources that they have vigorously pursued, due to the huge scale of capital held by insurance companies and their relatively long-term investment intentions, which give rise to a natural affinity between insurance capital and the equity investment method of PE/VC funds. Similarly, PE/VC funds are also one of the market partners favoured by insurance companies.
Although PE/VC funds are characterized by their high-risk and high-return investment nature, insurance companies can control risks by means of portfolio investment strategy, which allows insurance capital to return to its conservative investment nature while earning steady and considerable investment returns. These two advantages supplement each other perfectly.
Although the draft has yet to be implemented, and specific provisions may still see some changes, the overall regulatory spirit will remain consistent in the short term. With a view to gaining a head start in the future competition on raising funds, we recommend that PE/VC firms plan in advance, in light of the above-mentioned regulatory spirit, to be well prepared.
Catherine Chen is a partner and Sissi Chen is an associate at Zhong Lun Law Firm