In order to further standardize behaviors regarding the formation of insurance private equity funds, China Insurance Regulatory Commission (“CIRC”) released the Circular on Relevant Issues of the Formation of Insurance Private Equity Funds (the “Circular”) on September 11, 2015. The Circular specifies the categories, investment objectives, qualifications of the sponsors and the managers, conditions for formation, and other relevant systems of the private equity funds formed by insurance capital. The main points of the Circular are as follows:
Specify the Categories of Insurance Private Equity Funds
According to the Circular, the private equity funds formed by insurance capital can be categorized into growth funds, buyout funds, funds for emerging strategic industries, mezzanine funds, real estate funds, venture capital funds, and fund of funds (FOF) mainly investing in the aforesaid funds.
Limit the Investment Objectives of Insurance Private Equity Funds
According to the Circular, private equity funds formed by insurance capital shall invest in the industries and fields under the key support of the state, including but not limited to major infrastructure projects, shantytown renovation projects, new-type urbanization construction projects, and other livelihood projects and national key projects; scientific and technological enterprises, small and micro enterprises, emerging strategic industries, and other enterprises or industries under the key support of the state; and pension service, health and medical service, security service, Internet financial services, and other industries and businesses in line with the extension of the insurance industry chain.
Standardize the Management Structure of Insurance Private Equity Funds
The Circular specifies that the sponsor and the fund manager of an insurance private equity fund shall be determined before the formation of the fund. The sponsor shall be chaired by a subordinate body of an insurance asset management institution. The fund manager should be appointed by the sponsor and may be served by the sponsor or by an insurance asset management institution appointed by the sponsor or other subordinate body of the insurance asset management institution. If the fund manager is chaired by an insurance asset management institution, such institution shall have a corresponding investment and management capacity and have not less than three investment projects; if the fund manager is chaired by a subordinate body of the insurance asset management institution, such institution and its associated insurance institutions shall hold 30% or more of the shares of the subordinate body; such subordinate body should have at least three core decision makers who have more than 8 years’ experience in the related field; team members of which shall have completed not less than three exited projects.
Specify the Registration System of Insurance Private Equity Funds
According to the Circular, a registration system shall be introduced for private equity funds formed by insurance capital, and relevant registration formalities shall be applied to the CIRC or its designated institutions by insurance asset management institutions or fund sponsors.
Specify other Systems Regarding Insurance Private Equity Funds
The Circular also specifies other systems regarding the private equity funds formed by insurance capital, including: (1) the relevant negative list system and segregation system between the insurance institutions and fund sponsors to avoid risk transmission; (2) the custodian system to guarantee the safety and independence of fund assets; (3) rules regarding related party transactions, according to which if the investment business involves related party transactions, it shall be approved by two-thirds of voting rights of non-related parties in the decision-making bodies without objection of the investment advisory board, and the scale of investment shall not exceed 50% of the target size; (4) the report system which requires fund managers submit the fund raising report, quarterly report, annual report, and other relevant information to the information registration platform designated by the CIRC within five working days after the final closing, within 20 working days after the end of each quarter, and before April 30 each year.
Specify the Market-oriented Operation of Insurance Private Equity Funds
Circular sets forth that the fund manager shall have independent and market-oriented management and operation mechanisms, including but not limited to equity incentive mechanism, interest sharing mechanism, successor investment mechanism and other key mechanism; the sponsor and the associated insurance institutions shall contribute to or commit for not less than 30% of the amount of the target size.
The Circular provides definite legal ground for the formation and management of private equity funds formed by insurance capital. It helps to develop new means and path to connect insurance capital to entity economy and introduces new fund mode to the field of private equity fund.