Key policy changes under new notice on investment in private equity funds

China Insurance Regulatory Commission (CIRC) issued the Notice on Matters Related to the Establishment of Insurance Private Equity Funds on 10 September. The private equity industry is poised to benefit from the policy changes under the notice, and welcome a number of new players with deep pockets. This column will briefly overview the key points of the notice.

Q: What are the main policy changes under the new notice?

A: Previously, the main policy governing the investment of insurance capital in private equity (PE) funds was the Provisional Measures for Equity Investment with Insurance Funds issued by the CIRC on 31 July 2010.

Pursuant to the interim measures, insurance capital could invest in PE investment funds meeting certain requirements only in their own capacity as an active investor. Insurance capital which was acting a passive investor was unable to actively sponsor and manage a private equity fund.

Under the notice, insurance capital is now able to directly form and manage private equity funds. Insurance capital can also act as a sponsor that establishes a fund, and as its active manager, unlike the previous passive role it was required to take.

In sum, the greatest policy change is that insurance capital can actively form a private equity fund, and manage that private equity fund.

Q: What are the characteristics of a private equity fund formed by insurance capital?

A: First, only a subordinate institution of an insurance asset management institution can serve as sponsor (and if the fund is a limited partnership fund, it serves as a general partner). Pursuant to the Provisional Measures on the Administration of Insurance Asset Management Companies and the Notice on Issues Related to Revising the Provisional Measures on the Administration of Insurance Asset Management Companies, a subordinate institution is generally a subsidiary established by the insurance asset management company.

Second, under the new notice, the manager of the newly formed private equity fund must be a sponsor meeting certain regulatory conditions, a sponsor’s subordinate insurance asset management institution, or another subordinate institution of the insurance asset management institution.

Third, the capital contributions or the amounts subscribed for by the sponsor and its connected insurance institutions may not be less than 30% of the proposed size of the fund offering.

Q: What conditions must the fund manager satisfy?

A: A key focus of the notice is the fund manager. The notice sets forth conditions which it must satisfy. An insurance asset management institution serving as fund manager must have the relevant investment management capabilities. It also must be actually invested in no less than three projects.

A subordinate institution of the insurance asset management institution serving as fund manager must satisfy these conditions:

1. The equity held in the subordinate institution by the insurance asset management institution and its associated insurance institutions must account for more than 30% of the subordinate’s total equity;
2. The subordinate must have a stable management team with no fewer than three core decision makers who have at least eight years of relevant experience. The team must have completed no less than three divestment projects in total;
3. The subordinate must have independent, market-oriented management and operations mechanisms, including but not limited to equity incentives, benefits sharing and coinvestments.

   Q: What conditions must a private equity fund formed by insurance capital satisfy?

   A: The fund must satisfy a number of conditions under the notice, as set out below:

   1. The anticipated investment scale of a reserve project for which the proposal has been approved must cover at least 20% of the proposed size of the fund offering;
   2. The capital contribution percentage of the sponsor and its allied insurance institutions cannot be less than
      30% of the proposed size of the fund offering;
   3. During the period of investment,
      the fund must have a dedicated investment management team of no fewer than three officers, each of whom must possess at least three years of relevant experience;
   4. The fund must set up an investment advisory committee consisting predominantly of investors. The committee must focus on dealing with matters such as connected transactions and conflicts of interest;
   5. The fund must build a custody mechanism and its custodian must meet certain conditions.

Q: Is the fund required to be subject to double oversight?

A: In addition to oversight from the CIRC, a private equity fund established by insurance capital is subject to oversight in accordance with the Provisional Measures for the Supervision and Administration of Private Investment Funds, issued by the China Securities Regulatory Commission last year.

The fund also is required to comply with the trial Measures for the Registration and Filing of Private Equity Fund Managers issued by the Asset Management Association of China (AMAC), as well as other self-regulatory rules issued by the AMAC.

Q: Where does the notice dovetail with previous policy?

A: If the insurance capital is not involved in a fund’s formation, the provisional measures from 2010 apply.

Even when insurance capital is involved in a fund’s formation, if the equity percentage of the insurance asset management institution and its connected insurance institutions combined is less than 30%, the 2010 provisional measures continue to apply.

It should be noted that the provisional measures’ regulatory requirements relating to investment institutions (i.e. fund managers) are more stringent than those under the new notice.

Zhang Xianzhong is a partner of AnJie Law Firm