The China Insurance Regulatory Commission (CIRC) recently issued new regulations that relax restrictions on the investment of insurance proceeds by allowing insurance capital to be used for the formation of private equity funds within the PRC. The Circular of the China Insurance Regulatory Commission on Matters relating to the Formation of Insurance Private Equity Funds (the Circular) was released on 10 September 2015 and aims to further enhance the unique advantages of the long-term investment of insurance funds, support economic development and prevent potential risks. The Circular sets out the categories, investment objectives, governance structure, management and operation and registration and regulation of private equity funds formed by insurance capital (insurance PE funds).
Categories of insurance PE funds
The private equity funds formed by insurance capital can be categorised into growth funds, buyout funds, funds for strategic emerging industries, mezzanine funds, real estate fund, venture capital funds, and fund of funds (FoF) mainly investing in the aforementioned funds.
Investment objectives
PE funds formed by insurance capital will largely be required to invest in industries and fields deemed a national priority, including but not limited to major infrastructure projects, urbanization projects and strategic emerging industries.
Governance structure
In order to establish an insurance PE fund, the sponsor and fund manager must first be determined. The sponsor is to be chaired by the subordinate body of an insurance asset management institution and is mainly responsible for establishing the private equity fund, selecting a fund manager, safeguarding investors’ interests, carrying out investment transactions through the PE fund and undertaking legal liabilities. The sponsor has legal independence from the insurance asset management institution.
The fund manager can be chaired by the sponsor, an asset management institution appointed by the sponsor, or other subordinate body of the insurance asset management institution. The fund manager is primarily responsible for fund raising, investment management, information disclosure and fund exit, and is a management and investment institution for the PE fund.
Management and operation
Insurance PE funds are required to meet the following conditions:
- the expected investment scale of the reserve projects for which the proposal for approval has been completed shall cover at least 20% of the amount of funds raised;
- the sponsor and the associated insurance institutions must be at least 30% of funds to be raised;
- the fund must establish an investment management team with at least 3 investment managers with over three years of experience in the field;
- the fund must establish an investment advisory board to focus on dealing with matters such as related party transactions and conflicts of interest; and
- the fund must establish a custodian system to meet the prescribed conditions.
Registration and regulation
A registration system will be introduced for PE funds formed by insurance capital and plans to establish such funds are to be filed by the insurance asset management institutions or fund sponsors to the CIRC, or its designated agencies. Fund managers must submit fund raising reports, quarterly reports, annual reports to the CIRC after fund raising.
The Circular provides an exciting opportunity for fund managers and insurance companies in the PRC and provides guidance on the formation and management of the PE funds formed by insurance capital.
Ms. Yuan Min specialises in insurance-related legal matters. She is one of the first attorneys to practice insurance related legal affairs in the Chinese market and has extensive experience in domestic insurance matters. A substantial part of her practice involves transactional legal services on equity investments, M&A, the introduction of insurance products, regulatory compliance matters related to commercial property/casualty insurance, life insurance operations and reinsurance operations. Ms. Yuan has represented major Chinese insurance companies on the introduction of their foreign strategic partners. She has also represented leading international brokers to set up their offices in China, and introduction of insurance products to China. In addition, she has advised major international reinsurance companies on their regulatory compliance matters.
Will McCosker is a partner in King & Wood Mallesons' funds team, currently based in Shanghai. He specialises in international investment funds and cross-border investments, including private equity funds, hedge funds, infrastructure funds and “club-style” joint venture investments. He is also specialises in financial services regulation. Will spent over three years with a leading offshore law firm in the Cayman Islands and London. Will has advised on the establishment and operation of a number of multi-jurisdiction closed-ended, open-ended and hybrid fund structures.
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