The prospect of offshore private equity funds being permitted to market their funds to deep-pocketed Chinese insurance companies is quite alluring to the global private equity community. In an exciting development for the industry, this prospect took a significant step forward in October 2012 when the Chinese Insurance Regulatory Commission (“CIRC”) promulgated regulations which, subject to certain important conditions and requirements, permit Chinese insurance companies, for the first time, to invest in certain qualified offshore private equity funds sponsored by qualified sponsors. Although the legal regime under which these investments in global private equity funds will be permitted is still a work in progress, with many details and uncertainties yet to be sorted out, this Alert sets out the highlights of the CIRC’s actions to date.

Qualified Fund Sponsors

Investments will be permitted only in funds that are sponsored by “qualified” sponsors and satisfy certain conditions, including:

  • The sponsor has no less than US$15 million in paid-in capital or net assets and cumulative assets under management of no less than US$1 billion;
  • The sponsor has a mature investment team and an established track record;
  • The fund has at least US$300 million of committed capital and focuses on growth-stage or mature businesses; and
  • No financial institution or any subsidiary thereof can have de facto control over the management or operations of the fund and no financial institution or any subsidiary thereof can hold any general partner interest in the fund.

Qualified Chinese Insurance Companies

Any Chinese insurance company proposing to invest in a qualifying offshore private equity fund will need to comply with certain requirements, including:

  • A solvency adequacy ratio of not less than 120%; and
  • A limit of 15% of its total assets in overseas interests, including the proposed fund investment.

Implementing Mechanics

Despite these encouraging developments, there are still a number of important issues that must be clarified before qualifying offshore fund sponsors should plan on welcoming Chinese insurance companies to their limited partners meetings.  Among those issues are:

  • How the regulatory approval of specific fund investments will operate in practice;
  • The development through further regulatory processes or practices of detailed definitions for certain critical concepts, including those in determining qualifying status for sponsors such as “net assets” and “cumulative assets under management;” and
  • Of particular importance, whether Chinese insurance companies will be required to make any investments in a qualified offshore private equity fund through an “offshore fiduciary.”  This type of requirement currently applies to certain other permitted offshore asset classes for Chinese insurance companies.  The qualification standard for an “offshore fiduciary” in general is fairly high, e.g., having assets under management of no less than US$30 billion.  This requirement, if applicable to fund investments, will have the effect of limiting the range of intermediaries that Chinese insurance companies may use and may limit the ability of private equity sponsors to have the kind of direct access to Chinese insurance companies they might like in order to fortify relationships.

The CIRC’s rule-making is an encouraging development for the private equity community and has the potential to enhance the fundraising opportunities for non-Chinese private equity firms.  However, any rejoicing would be premature as there is still much work to be done before Chinese insurance companies will be able to supply offshore fund sponsors with a new source of capital.