Authored by Dr. Zhan Hao (

With an increase of the aggregate amount of insurance funds and adjustments of regulatory ideas of the insurance regulator, private equity investment and real estate investment by insurance funds have become heated topics in the relevant industries. In September, 2009, China Insurance Regulatory Commission (hereinafter referred to as CIRC) promulgated Interim Measures on Real Estate Investment by Insurance Funds and Interim Measures on Private Equity Investment by Insurance Funds (hereinafter referred to as IMPEIIF),triggering considerate discussion among real estate industry, various private equity funds, industrial funds, and venture capital funds who were all looking to opportunities.

However, in the following two years, as the two Interim Measures were too principle and there has been lack of implementation rules, we can rarely find a case where insurance funds have been made successful investment in real estate and private equity.

On July 16th,2012, CIRC promulgated Circular Regarding Private Equity and real estate Investment by Insurance Funds (No.592012by CIRC, (hereinafter referred to as the Circular ),making adjustments to and clarifying policies for private equity investment by insurance funds. The Circular also refined the two Interim Measures in the interest of insurance funds which could hardly wait for setting sail.

In this article, the authors attempted to make some preliminary analysis on how to comprehend and apply the forgoing new regulations combined with the practice of private equity investment by insurance funds.

1. Qualification Requirements for insurance companies to make investment in private equity

Article 9 of IMPEIIF sets forth qualification requirements for insurance companies to make investment in private equity. Under Item 5, the insurance company’s non-solvency margin ratio (SMR) in the last accounting year shall not be less than 150%. Under Item 6, the insurance companies should be profitable in the last accounting year and net assets shall be no less than RMB1billion. Moreover, non-SMR for insurance companies to make indirect private equity investmentshall be the same as stipulated in Item 5.   

The Circular makes the adjustments to the above qualification requirements as follows.

First, insurance companies to make private equity investment are not required to be profitable in the last accounting year. Moreover, the requirements for the net assets are adjusted to no less than RMB100 million from RMB1 billion

In reality, currently, most of the Chinese insurance companies have yet achieved profitability, other than a few large and medium-sized ones with a comparatively long history, due to the business rules inherent in insurance industry. Therefore, the two requirements in IMPEIIF actually shuta majority of the insurance companies out of the door to private equity investment. This time CIRC cancels the requirements of profitability and lowered the requirements for net assets by a large margin as well. Consequently, the number of qualified insurance companies for private equity investment was dramatically increased.

The authors of this article were of the view that first, the number of private equities of enterprises or private equity funds meeting the regulatory requirements is limited. Moreover, years of ongoing fever for equity investments has left only very few high–quality investment targets available for current investors As such, the competition in the private equity investment market will become fiercer following the entry of a large number of insurance companies into this market.

Under such circumstances, medium-sized and small insurance companies shall pay special attention to risk-control and establish strict mechanism for evaluating risks and taking precaution. Such companies shall never forget precautionary principle when competing for private equity investment targets. In particular, they shall fully comprehend the nature of insurance funds and always bear in mind the right order between safety and profitability.

Second, requirements for SMR of insurance companies should be lowered. We suggest the provision “SMR no less than 150% in the end of the last accounting year and no less than 150% in the end of last quarter when investment is made ” to be changed into “SMR no less than 120% in the end of last quarter”. Additionally, insurance companies with SMR lower than 120% should adjust their investment strategies and take effective measures to control risks.

Solvency adequacy supervision is one of the three pillars for insurance regulation and management. According to Management of Insurance Company Solvency Adequacy (Ordance12008by CIRC), CIRC classifies all insurance companies into three categories in terms of their solvency adequacy, namely, (1) unqualified companies whose SMRs are lower than 100%; (2) qualified companies I whose SMRs are between 100% and 150%; (3) qualified companies II whose SMRs are higher than 150%.

Under article 9 of IMPEIIF, only qualified companies II are accessible to private equity investments while qualified companies I are not accessible to equity investment. The Circular, lowering requirements for solvency, permit insurance companies with no SMR of less than 120% investing on private equities and replaces double time points for supervision as “in the end of last accounting year ”and “at the end of last quarter” with single one as “in the end of last quarter”. Currently there are a considerable number of insurance companies with SMR between 100% and 150% (namely, insurance companies under qualified ones I), so the adjustments by the Circular open the door for some of qualified companies I to private equity investment.

Indeed, allowance for insurance companies with SMR of no less than 120% means security cushion for insurance companies’ solvency adequacy is pretty thin because only 20% margin is left.

As one of the comparatively risky investments, private equity investment, once improperly conducted, might cause direct losses to insurance companies and even lead to their insolvency. To avoid such risks, the Circular further requires real-time follow-up supervision on insurance companies once they make investment in private equities. In the event that an insurance company’s post investment SMR is lower than 120%, it should make timely adjustments to investment strategies and take effective measures to control risks. Apart from this, Article 36.2 of IMPEIIF provides that in case of insolvency, CIRC should take regulatory measures to stop the investment business, make limits on investment ratio, adjust investment personnel, order disposal of equity assets, and impose restrictions on shareholders’ sharing dividends and senior managers’ remunerations.

Despite the foregoing remedy measures, whether the direct losses caused by investment can really be made up is well-worth discussion. What’s more, the nature of private equity investment means instant remedy measures are generally not effective in a short period. Thereforelegal professionals must take precaution measurescreating exit strategy for insurance funds and remedy to equity transferors and the administrators of private equity funds in advance.

2. Scope of Target Investees

Article 12.4 of IMPEIIF stipulates insurance funds can only be directly invested in equities of insurance companies, non-insurance financial companies, and insurance related elderly-care, medical and auto-service services. Under this provision, the scope for direct private equity investment by insurance funds is narrow: (1) insurance companies, including property insurance companies, life insurance companies, insurance assets management companies, insurance agencies, insurance brokers and etc. Generally, the critical considerations for making investment in such insurance companies are, business development and collaboration rather than profitability.(2) non-insurance financial companies such as banks, security companies, trust companies, etc. Generally, such investments are associated with mixed operation and mixed supervision. Therefore, relatively higher qualifications requirements apply for this type of investments. For example, according to the Circular Regarding Equities Investment on Commercial Banks by Insurance Companies (No.982006by CIRC), insurance companies to make equity investment must meet strict requirements. Therefore, only very few large domestic insurance companies or insurance group companies can invest in non-insurance financial companies; (3) Insurance-related elderly-care, medical and auto-service business. Insurance companies usually invest in these companies based on long-term strategic considerations, such as to attract more customers and lower operation costs instead of sole consideration of profits.

In Article 1.2 of the Circular, the scope of target enterprises of direct equity -investment by insurance companies extends to energy enterprises, resources enterprises, insurance-related modern agriculture enterprises and emerging business trading enterprises. The authors are of the views that the investments in the above enterprises can bring insurance companies more income compared with Article 12.4 of IMPEIIF. In addition, as the equities of these enterprises (energy and resource enterprises in particular) are barely associated with the business of insurance companies, insurance companies can primarily aim at profitability when investing in such enterprises.  

Nevertheless, with the extension of the scope of target enterprises of equity investment by insurance companies, the risks associated with equity investment particularly equity investment in energy and resource enterprises, increase dramatically.

In recent years, energy and resource prices are falling after a continuous growth. In addition, profitability of energy and resource enterprises is closely related to the macro-economy. Once economic growth slows down, these enterprises would face great profit pressure. Therefore, systematic risks associated with the macro-economy will have a direct impact on the safety of investment funds when insurance companies make investment in these enterprises.

In consideration of reducing the above risks, Article 1.2 of the Circular, requires the target enterprises shall be in conformity with the national micro-policies and industrial policies, to be stable in cash flow and perform well while expanding the scope of target enterprises of equity investment by insurance companies. Currently, the regulator of insurance industry has not set forth the index for stable cash flow and good performance. However, Article 12 of IMPEIIF, requires a target enterprise of direct or indirect equity investment by insurance funds shall be of market, technology, resources competitiveness with potential to improve its value, promising cash return prospects and established bonus system. The authors are of the view that insurance companies shall establish deal reserve systems in terms of the principle of maximum safety of insurance funds and set forth strict criteria for target enterprises in the deal reserve.

Meanwhile, investments in energy and resource enterprises were over-heated in the last few years and many leftover problems remain to be solved, e.g. problems associated with transfer and pledge of mining permits, mining outside permits, safety production and environmental pollution, clarification of enterprises’ property rights, and internal regulations of local governments. All of these problems might put insurance funds’ investment at risk. Therefore, thorough legal due diligence investigation must have been conducted and plans must have been made before a decision to investment can be made.

3. Indirect Investment by Insurance Funds

Equity investment by insurance funds includes indirect equity investment and direct investment. Indirect investment refers to insurance companies’ indirect investment in financial products of private equity funds launched by institutional investors. IMPEIIF clearly specifies requirements for equity funds to be invested by insurance companies and investment norms for indirect investment. The Circular made some adjustments on the provisions of IMPEIIF.

(1)   Capital Requirement for Private Equity Funds

Article 10 of IMPEIIF provides that the registered capital of an institutional investor which sets up and manages a private equity funds in which an insurance company makes investment should not be less than RMB 100 million.

Article 4.1 of the Circular modifies “registered capital” as “registered capital or subscribed capital”. In practices, institutional investors are usually structured as corporation, partnership and other forms of organizations. In case of partnership, the Partnership Agreements shall specify the names of the partners and the amount of their subscribed capital contribution and the partners should make capital injection as agreed. By inclusion of both “subscribed capital” “registered capital” as the requirements for institutional investors, the Circular made such requirements more practical. Once insurance funds are invested, the follow-up injection of subscribed capital should be closely watched. Liabilities for breach of contract and remedies should also be included in contract.

(2)   Classes of Investable Private Equity-funds

A private equity fund is a type of investment funds raising capital from specific targets in private. Such fund primarily makes investments in various equity securities of enterprises not quoted on a stock market and receives returns via exits such as IPO, M&A and MBO of the target companies.

According to the different developing stages of target companies in which private equity funds make investments, private equity funds can be categorized as venture capital funds, growth funds, M&A funds. Venture capital is an investment made for launch, early development or expansion of a business. Growth funds are invested on enterprises with great potential to develop into significant economic contribution. M&A funds are intended for well-developed enterprises with stable growth and sustainable profitability. M&A funds receive returns by purchasing target companies’ equities, restructuring the companies and then exit in a proper way after holding equities for some time. M&A funds can be subcategorized as controlling M&A funds and participating M&A funds in light of its investment strategies. Controlling M&A funds aim at taking control of the target enterprise, leading in its amalgamation, restructuring and operation, improving its profitability, and then exit by transferring equities; Participation M&A funds assists other M&A leading parties in integrating and restructuring the target enterprise. Private equity funds can also be divided into comprehensive investment funds and industry investment funds according to target industries in which private equity funds are to invest. The former imposes no limits on target industries while the latter usually focuses on specific industries, such as, real estate, energy, emerging strategic industry, etc. In general, industry investment funds required to participate in enterprise management, assist the target enterprise with making medium-and-long-term developing plans, investment evaluation and schedule management plan, and make sales plan, etc. Industry investment funds center around target enterprises’ current operation and management and long-term development, commit themselves in improving corporate governance of the target enterprise to, receive stable profits returns of such enterprises. In comparison, industry investment funds are much more involved in target enterprises’ management. Private equity funds can also be divided into direct investment funds and mother funds as far as whether to directly invest target enterprises is concerned. Mother funds, also termed as “Fund of Funds (FOF)”, do not make equity investments directly in target enterprises but in other private equity funds. Certainly, the above appellations are only universal in financial circle and there are no clear lines among various funds.

Article 1.5 of the Circular set forth the private equity funds in which insurance funds can make investment as follows.

Growth funds: It shall be noted that Article 15 of Interim Measures on Use and Management of Insurance funds provides that insurance funds shall not be engaged in venture-capital investment; Article 12 of IMPEIIF reaffirms this position. As such, insurance companies should distinguish venture capital funds from growth funds when making indirect equity-investment.

M&A funds: The Circular provides that investment targets of M&A funds include publicly traded stocks but only limited to non-transaction transfer modes such as strategic investment, private placement, block deals, and the size of investment should not exceed 20% of the remained fund assets. Regulatory authorities impose definite proportion restrictions on insurance funds’ on equity investment. Briefly, since M&A funds are allowable for investing stocks of listed companies, the proportion for insurance funds in equity-investment is increased accordingly.

Emerging strategic industry funds: The Circular specifies the scope of investment target by emerging strategic industry funds as follows: equities of financial service enterprises, equities of elderly care business, equities of medical business, equities of modern agricultural enterprises and equities of enterprises investing and managing public rental housing or low rent housing. The forgoing provisions not only take consideration of insurance funds’ profitability but also are compatible with the national policies orientation on investment.

FOF targeting at the above-mentioned funds: FOFs transaction structure shall be simple, clear and exclusive of the other FOFs. With regards to this, legal professions should be fully aware of the investment structure of a fund while conducting due diligence investigations on a potential investment target.

(3)   Restrictions on Actual Controller of Private Equity Funds

In accordance with Article 1.6 of the Circular, non-insurance financial institutions cannot have actual control on the management or operation of private equity funds or hold general partnership equities interests in private equity funds in which insurance funds make investment, from which we can conclude that CIRC impose two restrictive requirements for private equity funds in which insurance funds can make investment.

First, non-insurance financial institutions and their subsidiaries cannot have actual control on management and operation of the private equity funds. This provision excludes private equity funds actually controlled by banks, security companies, trust companies and their subsidiaries from the scope of investment targets.

Second, non-insurance financial institutions and their subsidiaries cannot hold the general partnership equities interests in private equity funds. Most private equity funds are structured as limited partnership. Partners of such partnership include general partners and limited partners. A general partner manages funds and shall bear unlimited liability for the partnership’s debts, while a limited partner is a primary capital contributor and shall only be liable for the partnership’s debts to the extent of the capital contribution he paid. The Circular requires that insurance funds shall not invest in a private equity fund in which non-insurance financial institutions and their subsidiaries hold a general partner’s equity interest.

However, there is no definition about “actual control” in department regulations and regulatory documents by CIRC. Article 217 of the Company Law stipulates as follows “(2) a controlling shareholder refers to a shareholder whose capital contribution occupies 50% or more in the total equity stock of joint stock limited company or a shareholder whose capital contribution or proportion of stock is less than 50% but who enjoys a voting right according to its capital contribution or the stocks its holds is large enough to impose an significant impact upon the resolution of the shareholders’ meeting or shareholders’ assembly. (3) an “actual controller”, refers to anyone who is not a shareholder but is able to hold actual control of the acts of the company by means of investment relations, agreements or any other arrangements. The author holds the opinion that though the aforesaid provisions are not directly applicable, it might serve as a reference in defining “actual control” relationship.

4. Classes of Applicable Funds for Private Equity investment

Article 14 of IMPEIIF provides in making equity investment: insurance companies should (1) use capital for controlling equity investment; (2) use capital or liability reserve matching duration of investment for other direct equity investment (3) use capital or liability reserve for insurance product for indirect equity investment. When Life insurance companies use all-purpose capital, dividends and investment-linked insurance; Property insurance companies use capital of non-insurance and unscheduled returns, they shall meet with product attributes and investment programs.

Article 1.7 of the Circular expands the classes of funds which can be used for equity investment:

First, in addition to capital, an insurance company might use their reserves, such as capital reserves, undistributed profits According to Article 9.4 of IMPEIIF, major equity investment refers to investment in non-insurance financial enterprises or insurance related enterprises resulting in control of such enterprises. Under IMPEIIF only capital can be used for equity investment resulting in controlling interests. But the Circular extends the class of funds which can be used for major equity investment from capital to self owned reserves such as capital reserves, undistributed profits, etc.

Second, insurance companies can use self owned reserves, liability reserves or other funds for non major equity investment. Therefore, in addition to capital, capital reserve and undistributed profits, insurance companies can use other funds as well. Since the Circular does not define the scope of “other funds”, it remains to be specified by other relevant documents by CIRC. The authors are of the opinion that before CIRC has specified “other funds” in other relevant documents, investment involving “other funds” might not be made before an approval.

5. Investment Ratio for Equity Investment

Article 8.1 of the Circular makes adjustments to investment ratio for equity investment as follows:

(1)   Raising Upper Limit for Investment Ratio

Article15(1) of IMPEIIF provides that book balance for equity investment in companies not quoted on a stock market shall not more that 5% of the company’s gross assets in the end of last quarter; Book balance of investing financial products investment in entities not quoted on a stock market such as private equity funds shall not be more than 4% of its gross assets in the end of last quarter; The two totals shall be no more than 5% of the company’s gross assets in the end of last quarter.

The Circular imposes no respective proportional restrictions on insurance companies equity investment in a company not quoted on a stock market and a private equity-fund, instead, insurance companies may determine the methods for investment on their own. Meanwhile, book balance of the two totals has been increased from no more than 5% to 10% of the company’s gross assets in the end of last quarter, among which, book balance is exclusive of direct equity investment in insurance related enterprises by insurance companies with self owned funds.

Statistics of CIRC show the total assets of insurance industry amounts to RMB 6780 billion by June, 2012. After the upper limit is raised from 5% to 10%, the insurance capital for equity investments shall be increased by roughly RMB 200 billion.

(2) Adding proportional restrictions on accumulative investments on one fund by affiliated companies

Article 15(3) of IMPEIIF provides book balance of investments in one fund shall not exceed 20% of the issued volume of the funds.

Furthermore, the Circular imposes restrictions on accumulative investments in one fund by affiliated companies: Accumulated book balance for equity investment in one fund by insurance group (holding) companies and its subsidiary’s shall be no more than 60% of issued volume of the fund. Insurance companies and its investment holding insurance institutes shall execute the above provision accordingly.

6. Timeframe for Filing Equity Investment Report

According to Article 32, 33 and 34 of IMPEIIF, insurance companies, institutional investor of private equity funds, and trust institutes shall file quarterly and annual reports to CIRC Such reports are one of the important tools for CIRC to supervise insurance companies’ equity investment activities, investment institutes and trust institutions’ performances.

Under Article 1.10 of the Circular, CIRC relax its time requirements for filing such reports

Reporting Body

Type of Report


Pro- Adjustments


Post- Adjustments

Insurance company

Quarterly report

15 working days after each quarter ends

30 working days after each quarter ends

Insurance company

Annual report

Before March 31st each year

Before April 30th each year

Institutional Investors

Annual report

Before March 31st each year

Before April 30th each year

Trust institutions

Quarterly report

15 working days after each quarter ends

30 working days after each quarter ends

Trust Institutions

Annual report

Before March 31st each year

Before April 30th each year

7. Requirements for Private Equity Investment Professionals

Certain number of highly competent professionals is human resource foundation for equity investment and risk avoidance associated with private equity investment.

(1)   Integration of Investment Team of Insurance Group (Holdings)

With a view to integrating internal investment resources of Insurance Group (Holdings), Circular on Matters Regarding Supervision on Use of Insurance funds (No. 442012by CIRC) provides that in making equity investment, Insurance Group (Holdings) and its subsidiaries can integrate its internal resources to build up a professional team providing unanimous counseling services and technical supports.

Article 2.1 reiterates Circular on Matters Regarding Supervision on Use of Insurance funds .allowing Insurance Group (Holdings) to integrate its internal resources to establish a professional team providing unanimous counseling services and technical support. Meanwhile, the Circular requires insurance institutions where the professionals are stationed should meet the requirements set forth by IMPEIIFE. Under Article 11 of IMPEIIFE, professional institutions providing with services insurance funds making equity should meet the following requirements: having established corporation governance, management, decision-making procedures and internally control mechanism; investment management being in compliance with Chinese laws and regulations and relevant policies; acceptance of CIRC inquiries regarding investment by insurance funds and making relevant reports to CIRC; no major law or regulation violations in recent three years; possession of business qualifications recognized by related authorities; being familiar with laws, regulations, policies, business procedures and transaction structures regarding equity investment by insurance funds; no affiliation relationship with related parties to private equity investment by insurance funds; other prudential requirements by CIRC. Counseling institutions, apart from meeting the above requirements, are also bound by the following requirements: (a) having a well-developed and stable team of professionals with no less than 6 experienced staff in equity investment, at least 3 of whom have over- five-year experience; (b) having no less than 2million of registered capital.

(2)   Lowering Requirements for Insurance Companies’ Professionals

Article 9 of IMPEIIF provides the asset management department of an insurance company shall have at least 5 experienced professionals with more than 3 years working experience in private equity investment if direct equity-investment is to be made; the asset management department shall have professionals who are familiar with business management if major equity investment is to be made; the asset management department shall have at least 2 professionals with at least 3 years of working experience in private equity investment or related experience, if indirect equity investment is to be made.

Article 2.1 of the Circular adjusts staffing requirements as “the asset management department shall have at least 2 professionals with at least 3 years of working experience in private equity investment or related experience if professional institutions or investment institutions are employed for counseling services and technical support. The professional requirements regarding indirect equity investment remains unchanged.

The above adjustments are supposed to accord with complains from assets management companies for a lacking of professionals.

8. Requirements for Private Equity Funds Exit and Management Assets Balance

Article 10.4 of IMPEIIF provides that for a private equity fund to be invested by insurance companies, its institutional investor launched and manages such fund must have consummated no less than 3 exited deals with no less than 3 billion of asset balance under management. Article 2.2 of the Circular defines the “exited deal” and “balance of asset under management”.

(1)   Definition to “ exited deal”

Article 2.2 of the Circular defines “exited deal” as “the number of total exited deals where the institution’s professionals played leading roles for such investment.” The “exited deal” can be measured from two perspectives:

First, from the perspective of roles of the institution’s professionals in the exited deals, such professionals shall play leading roles in investment decision, investment management, design of transaction structure and restructuring. However, there are rooms for discretion with respect to evaluation of leading roles.

Second, the number of exited deals of an institution can be consolidated. There might be several investment teams in an institution. In counting the number of exited deals, exited deals by all teams can be counted rather than the mere exited deal by the designated equity investment team.  

(2)   Definition to “balance of assets under management ”

Article 2.2 of the Circular further defines “balance of asset under management” as “the balance of collected assets and capital in China and denominated in RMB”. Under this provision, balance of asset under management shall meet three requirements: first, assets balance shall incur within the territory of china. Asset under management of an institution but outside the territory of china shall not be counted in. Second, such balance of asset should be denominated in RMB exclusive of asset denominated in t foreign currencies such as Dollar, Euro, etc. Third, the assets balance shall have been collected exclusive of agreed but not yet collected assets or capital.

From the author’s point of view, the above rules are operable and exclusive of some unqualified investment targets.

9. Internal Control of Insurance Companies

Internal control refers to the mechanism and process directing insurance companies’ departments and personnel at all levels, in accordance with their respective responsibilities, to take appropriate measures to rationally prevent and effectively control all risks in management, and to prevent the company from deviating from its developing strategies and objectives. Internal control is one of the important approaches for insurance company to improve its risk-precaution ability and management and to promote compliable, stable and effective managements.

Insurance funds’ equity-investment, a comparatively independent part of insurance companies’ operation, tends to be extremely risky and should be the focus of internal control. Article 9 of IMPEIIF requires equity-investing insurance companies should have established corporation governance, management system, policy-decision procedures and internal control mechanism. Article 3.1 of the Circular further states equity-investing insurance companies should have established management system, operating procedure, internal control and auditing rules, prevent operational risks, immoral conducts, propping and tunneling, and wipeout illegitimate associated-transactions and other transactions. Senior managers and relevant personnel of an insurance company shall not make investments on the corporation’s equity-investments in his own name or in the name of others.

The above rules should be attached more importance by genuinely mix-operating insurance institutions to avoid ill-formed associated-deals.

In the mean time, the multi-risks of equity-investment funds make more requirements to insurance companies’ risks control.

10. Private Equity Investment in Foreign Currency

Article 3.2 of the Circular specifies investment by insurance companies in domestic enterprises not quoted on a stock market in foreign currency should be under management for foreign investment by insurance companies. It appears that regulatory authorities differentiate the methods for supervision based on form of currencies for capital injection. Investment made by RMB is governed by IMPEIIF while investment made by foreign currency is governed by Interim Measures on Insurance Funds Foreign Investment Management. Comparatively, foreign investment should be made in the form of entrusted investment, and supervisions on investors, investment qualification and procedure for examination and approval appear to be tighter.