Emerging trends for insurance fund investment in PE funds

By Sun Jian and Wang Junlu, Zhong Yin Lawyer

Much meaningful exploration has been attempted by insurance companies since 2008 to participate in China’s healthcare service industry. For example, through its subordinate trust companies, Ping An invested in health screening and high-end medical institutions, including China’s largest non-public health examination institution, Ciming Health Checkup Management, and medical institutions jointly founded by Ping An Trust and Sun Yat-sen University.

Sun Jian Senior Partner Zhong Yin Law Firm
Sun Jian
Senior Partner
Zhong Yin Law Firm

Operating within the same industry chain, pharmaceutical companies have also invested successfully in the healthcare market, and their experience merits special consideration by insurance companies. For Fosun Pharmaceutical – a group with 30 pharmaceutical companies which is noted for its acquisition-oriented development model – its acquisition of shares in Chindex Medical in 2010 gave it indirect control of Chindex’s high-end for-profit hospital business and an overseas medical device company. Fosun mainly targets profit-oriented hospitals for investment in a bid to directly share in their revenues.

During the national insurance regulation conference held on 26 January 2015, Xiang Junbo, the chairman of the China Insurance Regulatory Commission (CIRC), released a “report card” showing a five-year record-breaking performance in investment yields and overall investment returns of insurance assets. According to Xiang, the operating efficiency of the insurance industry improved significantly in 2014, with total profit projected to reach RMB204.6 billion (US$33.2 billion), up 106.4% year over year. There is no doubt that investment has contributed greatly to the overall profitability of insurance companies.

Thus, it is imperative to thoroughly study matters relating to the investment of insurance funds in private equity (PE) funds. Given the operational flexibility of partnership PE funds and the special preferential policies they enjoy, we will focus on issues involved in the investment of insurance funds in partnership PE funds.

Matching insurance and PE

First, PE is characterised by a long investment cycle that requires a suitable exit mechanism. PE funds invest in target companies through equity acquisition, with the aim of obtaining handsome returns on investment upon exit. Current market practices list equity transfer and stock listing as the main exit channels for PE funds, with the latter in particular promising relatively higher returns. On the other hand, insurance funds are suitable for long-term investment rather than short-term profit seeking.

Second, it is impossible for the investment managers of insurance companies to be experts of all industries. Through investment in PE funds, they can fully use the investment and management expertise of PE fund managers. Finally, partnership PE funds afford insurance funds the flexibility in terms of capital contribution and exit arrangements as capital to such PE funds is contributed by subscription.

Eligible PE funds

First, unlike venture capital, PE funds target companies in line with state industry development policies, i.e. companies with stable cash flow return expectations or asset appreciation potential, instead of those that are highly polluting or energy-intensive, those that fail to meet national energy conservation and environmental protection standards, or those with low added technical value.

Wang Junlu Lawyer Zhong Yin Law Firm
Wang Junlu
Zhong Yin Law Firm

Second, PE funds operate according to well defined investment goals, plans, strategies, standards, procedures, follow-up management, profit distribution and liquidation arrangements. They have clear transaction structures, sufficient risk warning, and accurate and complete information disclosure. All of these mean that PE funds need to set up and keep improving relevant internal control systems in compliance with CIRC’s requirements. Third, investment fund custody has been put into practice for PE funds, allowing them to implement predictable and viable exit arrangements and effective risk control measures. In addition, PE deals are conducted in marketplaces designated by regulatory authorities, with an established advisory committee system.

Take pharmaceutical funds as an example. On 23 January 2015, the CIRC announced its approval for Sunshine Asset Management to set up the Sunshine Integrate Healthcare Industry Growth Fund as the first medical and healthcare PE fund launched by insurance companies in China. Sunshine Integrate Fund Management was approved by the CIRC to implement a stock ownership scheme for core team members, which makes the operation of the PE fund highly market-oriented, giving it unparalleled competitiveness in areas such as resources support, fund-raising, investment selection and talent pooling. This has significant implications in terms of maximising the advantages of insurance funds, enhancing their earnings, fully leveraging the combination of insurance funds and industry advantages, and giving full play to the social support, social management and other similar roles of insurance companies.

Considering the inherent relevance between the two industries, establishment of healthcare industry funds by insurance funds is in keeping with the requirements of the new 10 state regulations of the State Council (Opinions of the State Council on Accelerating the Development of Modern Insurance Industry and the Opinions of the State Council on Accelerating the Development of Commercial Health Insurance), and will also be conducive to integrating resources, displaying synergistic industry effects and insurance asset management advantages, and improving healthcare management efficiency.

Judging by the existing equity investment models of insurance institutions, Chinese insurance institutions can be generally divided into three categories: (1) the unique investment model represented by Ping An Group, which is characterised by a high degree of investment activity; (2) the independent investment model represented by China Life, whereby an independent organisation with relatively sophisticated investment teams and extensive operation experience is set up for alternative investment activities; and (3) the majority of insurance institutions are still feeling their way through equity investment operations, with the division of responsibilities between the asset management company and its parent being rather blurred.

Going forward, insurance fund operators are sure to look further into various models of equity investment, and we will follow up with the emerging trends in due course.

Sun Jian is a senior partner and Wang Junlu is a lawyer at Zhong Yin Lawyer

(Zhong Yin)

Dongsanhuan Zhonglu 39, Chaoyang District

Beijing 100022, China

Tel: 86 10 5869 8899

Fax: 86 10 5869 9666

E-mail: sunjian@zhongyinlawyer.com