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1. Members registered in this website must abide by the provisions on the administration of Internet electronic announcement service, and shall not publish information such as defamation of others, invasion of others' privacy, infringement of others' intellectual property rights, spread of viruses, political speech, commercial information, etc.
2, in all the articles published in the site, the site has the final right to edit, and reserve the right to print or publish to a third party, if your information is not complete, we will have the right to use your work published in the site without any notice.
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CNY20 Trillion Insurance Funds Dive into the Direct Private Equity Investment Market

Wang Shu Updated November 27, 2020

Subjected to new asset management rules released in 2018, Chinese banks, trust companies and other financial institutions have been facing stricter scrutiny. And it’s leading to a drastic drop of source capital in the direct financing market. Against this background, “insurance funds” have caught the public eye as an alternative source of funds. In this article, we explore the pitfalls and opportunities in this new investment landscape.  

Clearing Away the Roadblocks

Responding to a market appealing for supervision reforms, China Banking and Insurance Regulatory Commission (CBIRC) deployed a three-part “tool kit” to pave the way for insurance funds to enter the direct financing market:

1)    Capital source: Releasing the Insurance Asset Management Product Provisional Administrative Measures in March 2020 to define regulatory standards for asset management products of the insurance family tree, opening the doors wide for individual investors.

幻灯片1.JPG


2)    Agency management: Releasing the Notice on Optimizing the Supervision of the Investment Management Capability of Insurance Institutions to free Chinese insurance agencies from administrative procedures related to investment management and facilitate agencies’ self-regulation.

3)    Investments: Releasing the Notice of the China Banking and Insurance Regulatory Commission on Matters Concerning Financial Equity Investment with Insurance Funds. This allows financial equity investment by insurance funds to remove target industry restrictions and enhance motives for insurance funds to march into equity investment.

From entrance through to exit, the way is now clear of barriers. Through these updated rules, insurance agencies are guided to employ equity funds and borrowed funds (funds raised through insurance asset management products) in the equity investment market.

But Hidden Traps Lie in Wait

Though the way may be officially clear, upsets are still possible. Insurance funds, the major parts that insurance agencies can handle, prefer low risk and high liquidity. So, when lifting the strict regulations on insurance funds, they are bound to invest in pre-IPO enterprises to make quick money. Indeed, they enter the equity investment market with huge passion, but not as expected:

1)    Short-term inflation in the investment circle: If insurance funds are no longer restricted by the industry scope of direct investment, industry markets such as 5G communication (the hot topic nowadays) will certainly be their first choice to cash in. And their adding ante will push up the valuation and market price of the pre-IPO enterprise. Although leading enterprises in each industry can absorb some extra funds, they are also more likely to have higher valuations in the primary market than secondary – which is obviously abnormal for listed companies.

2)    GP-like LPs and consultant-like GPs will multiply like rabbits. Rather than sharpening their own capability by forming their own team, system and investment style, which is time and capital consuming, the more cost-effective and feasible way to make direct equity investment right now is to cooperate with external investment managers, especially private equity (PE) firms.

In the short term, this may promote interaction between insurance agencies and GPs with a strong ability for sourcing high-quality projects, especially small and medium-sized GPs. But in the long run, insurance funds may prefer to primarily or even only invest in PE firms when the latter can offer direct investment opportunities for the former. LPs increasingly play the role of GPs, and GPs are reduced to advisors.

3)    Insurance funds cannot make up for the market’s lack of long-term funds. Similar to the first trap, insurance funds may enter the equity investment market in an attempt to make quick money. As such, venture and early investment will not receive support from insurance funds as planned by regulatory reforms. That is worsened by the fact that insurance funds have quota limits in equity investment.

Signposts to Guide the Way

The following tips should be helpful to avoid previously mentioned traps and benefit industry players:

1)    Improve the existing terms of cooperation between insurance funds and PE funds (VC funds included), such as removing the CNY500 million ($76.0 million) upper limit for insurance funds to invest into VC funds.

2)    Encourage insurance agencies to launch their own funds or invest into market-based fund of funds (FoFs), especially those FoFs that have exposure to VC funds. FoFs are beneficial to diversify risks, thus can attract insurance funds into venture and early investment.

3)    Clarify qualification requirements and industry standards of investment consultancy service providers for insurance institutions; smooth the two-way selection for both insurance agencies and third-party service providers; and let PE funds and insurance companies have their own rather than "other's" role to play.

4)    Complete the assessment criteria and establish a fault-tolerant mechanism for long-term investment with insurance funds. Insurance agencies should be encouraged to study long-term investment and gradually convert a part of their insurance funds into more patient capital.

5)    Provide preferential tax policies for long-term investment so that insurance funds are led and supported to engage in long-term investment activities.




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REGISTER NOW !
CHINA-BASED
GLOBAL PLATFORM
FOR GPs & LPs
E-mail adress
Password
l read and agree to
Terms&Conditions
Create a new account Sign up!
Forget Password
CHINA-BASED
GLOBAL PLATFORM
FOR GPs & LPs
Name
Surname
E-mail address
Password
Confirm password
l read and agree to
Terms&Conditions
Already have an account? Sign in!
Please go to the mailbox to approve the registration
CHINA-BASED
GLOBAL PLATFORM
FOR GPs & LPs
FOF WEEKLY Account terms of service
1. Members registered in this website must abide by the provisions on the administration of Internet electronic announcement service, and shall not publish information such as defamation of others, invasion of others' privacy, infringement of others' intellectual property rights, spread of viruses, political speech, commercial information, etc.
2, in all the articles published in the site, the site has the final right to edit, and reserve the right to print or publish to a third party, if your information is not complete, we will have the right to use your work published in the site without any notice.
3. During the registration process, you will choose the registration name and password. The choice of registration name shall comply with laws, regulations and social ethics. You must keep your password confidential and you will be responsible for all activities that take place under your registered name and password.
Already have an account? Sign in!
E-mail adress

CNY20 Trillion Insurance Funds Dive into the Direct Private Equity Investment Market

Wang Shu Updated November 27, 2020

Subjected to new asset management rules released in 2018, Chinese banks, trust companies and other financial institutions have been facing stricter scrutiny. And it’s leading to a drastic drop of source capital in the direct financing market. Against this background, “insurance funds” have caught the public eye as an alternative source of funds. In this article, we explore the pitfalls and opportunities in this new investment landscape.  

Clearing Away the Roadblocks

Responding to a market appealing for supervision reforms, China Banking and Insurance Regulatory Commission (CBIRC) deployed a three-part “tool kit” to pave the way for insurance funds to enter the direct financing market:

1)    Capital source: Releasing the Insurance Asset Management Product Provisional Administrative Measures in March 2020 to define regulatory standards for asset management products of the insurance family tree, opening the doors wide for individual investors.

幻灯片1.JPG


2)    Agency management: Releasing the Notice on Optimizing the Supervision of the Investment Management Capability of Insurance Institutions to free Chinese insurance agencies from administrative procedures related to investment management and facilitate agencies’ self-regulation.

3)    Investments: Releasing the Notice of the China Banking and Insurance Regulatory Commission on Matters Concerning Financial Equity Investment with Insurance Funds. This allows financial equity investment by insurance funds to remove target industry restrictions and enhance motives for insurance funds to march into equity investment.

From entrance through to exit, the way is now clear of barriers. Through these updated rules, insurance agencies are guided to employ equity funds and borrowed funds (funds raised through insurance asset management products) in the equity investment market.

But Hidden Traps Lie in Wait

Though the way may be officially clear, upsets are still possible. Insurance funds, the major parts that insurance agencies can handle, prefer low risk and high liquidity. So, when lifting the strict regulations on insurance funds, they are bound to invest in pre-IPO enterprises to make quick money. Indeed, they enter the equity investment market with huge passion, but not as expected:

1)    Short-term inflation in the investment circle: If insurance funds are no longer restricted by the industry scope of direct investment, industry markets such as 5G communication (the hot topic nowadays) will certainly be their first choice to cash in. And their adding ante will push up the valuation and market price of the pre-IPO enterprise. Although leading enterprises in each industry can absorb some extra funds, they are also more likely to have higher valuations in the primary market than secondary – which is obviously abnormal for listed companies.

2)    GP-like LPs and consultant-like GPs will multiply like rabbits. Rather than sharpening their own capability by forming their own team, system and investment style, which is time and capital consuming, the more cost-effective and feasible way to make direct equity investment right now is to cooperate with external investment managers, especially private equity (PE) firms.

In the short term, this may promote interaction between insurance agencies and GPs with a strong ability for sourcing high-quality projects, especially small and medium-sized GPs. But in the long run, insurance funds may prefer to primarily or even only invest in PE firms when the latter can offer direct investment opportunities for the former. LPs increasingly play the role of GPs, and GPs are reduced to advisors.

3)    Insurance funds cannot make up for the market’s lack of long-term funds. Similar to the first trap, insurance funds may enter the equity investment market in an attempt to make quick money. As such, venture and early investment will not receive support from insurance funds as planned by regulatory reforms. That is worsened by the fact that insurance funds have quota limits in equity investment.

Signposts to Guide the Way

The following tips should be helpful to avoid previously mentioned traps and benefit industry players:

1)    Improve the existing terms of cooperation between insurance funds and PE funds (VC funds included), such as removing the CNY500 million ($76.0 million) upper limit for insurance funds to invest into VC funds.

2)    Encourage insurance agencies to launch their own funds or invest into market-based fund of funds (FoFs), especially those FoFs that have exposure to VC funds. FoFs are beneficial to diversify risks, thus can attract insurance funds into venture and early investment.

3)    Clarify qualification requirements and industry standards of investment consultancy service providers for insurance institutions; smooth the two-way selection for both insurance agencies and third-party service providers; and let PE funds and insurance companies have their own rather than "other's" role to play.

4)    Complete the assessment criteria and establish a fault-tolerant mechanism for long-term investment with insurance funds. Insurance agencies should be encouraged to study long-term investment and gradually convert a part of their insurance funds into more patient capital.

5)    Provide preferential tax policies for long-term investment so that insurance funds are led and supported to engage in long-term investment activities.