Points to ponder when PE/VC funds bring in insurance capital

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).