India unlocks insurers for PE investment

Insurance companies in India, representing a potential $10 billion in capital, have been given the green light to invest in alternative investment funds.

Insurance companies in India will now be allowed to invest in private equity funds and other alternative investment vehicles, the country's Insurance Regulatory and Development Authority said in a circular sent to local insurance companies in August. 

Under the new guidelines, insurers may invest in Category I and II alternative investment funds, which include domestic private equity funds. The regulation does not allow insurance companies to invest in offshore private equity vehicles. 

It is unclear how much capital will be unlocked by the new regulations, however local media has estimated it at $10 billion. 

According to the circular, life insurance companies may have 3 percent of their respective assets allocated to alternative investments, making up no more than 10 percent of the total private equity vehicle or 20 percent of its overall exposure to alternative assets – whichever is lower. 

General insurance companies are permitted to have 5 percent of their assets invested in alternatives, with the same exposure limits as per life insurance firms. 

“For the domestic private equity industry, this is a significant development because [previously] insurers were restricted from participating in any alternative investment funds, which included domestic private equity and venture capital funds,” said Siddharth Shah, partner at Khaitan & Co.

Many insurance companies already have teams qualified to assess opportunities in alternative assets as they had previously been allowed to invest in infrastructure and SME funds in India. However, they had been restricted to these sub-classes, Shah explained. 

…this is a significant development because [previously] insurers were restricted from participating in any alternative investment funds,

Although some of the well-established managers such as ChrysCapital and Everstone Capital Partners have closed successful funds, fundraising in India has been difficult as the stalled exit environment has put off investors. 

During 2012, the amount of capital raised for the country declined 60 percent to $1.67 billion, compared to $4.26 billion in 2011, according to PEI’s Research & Analytics division. 

“GPs who will benefit the most are the domestic institutional GPs such as ICICI Venture or IDFC. They’re all large institutional [players] who would tend to benefit out of this because they will be able to raise capital from insurance companies. But there are also smaller players who are benefiting significantly out of insurance and banks contributions, including many of the foreign GPs who have set up domestic pools of capital,” said Shah. 

China has gone through a similar transition recently. In October last year, the China Insurance Regulatory Commission (CIRC) released regulations that allowed Chinese insurance companies to invest in private equity in 45 countries and regions.

“This opens the door for a potentially very large source of capital for private equity,” said at the time Mayer Brown partner Ren Yong. Many of these insurance companies have multi-billion RMB assets, he said.