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In the life insurance segment, the LIC is the largest domestic insurance player to invest in VCPE funds. As of August 2014, LIC had invested in about 250 funds out of the 1500 – 2000 VCPE funds launched in India, i.e., in about 10% of all the funds operating in India. Though they have invested in a large number of funds, the commitment per fund is still small. This discourages many PE firms to approach investors like LIC as they go after investors who make large commitments. Among the non-life insurance companies, General Insurance Corporation (GIC) is one of the leaders. As of July 2014, GIC had made commitments to 24-25 funds, with a total commitment value of Rs. 230 crores. The average commitment per fund by GIC is about Rs. 10 crores, whereas the maximum commitment they make to any fund is Rs. 15 crores. In a few instances, GIC had made a minimum commitment of Rs. 7.5 crores. Other private sector life insurance companies are yet to reach a critical size that would provide them opportunities to invest in VCPE funds. In the general insurance category, VCPE investments are dominated by the public sector major, General Insurance Corporation (GIC). The investment preference is in the infrastructure, micro small and medium enterprises, health and education sectors. As most policies of general insurers are yearly contracts with annual renewals, there is no certainty of cash flows. As a result, committing substantially to a long term investment like VCPE may not be encouraging. Further, as insurance companies are expanding their presence worldwide, need for capital may also deter committing funds for the long term to the VCPE asset class. Reasons for low investment levels by Insurance Companies Insurance companies allocate a low proportion of their assets to the VCPE asset class. This reflects the nature of the investment approach - low risk and better liquidity of investments. Private equity investments are volatile in nature and as a result, carry more risk. To quote Nirakar Pradhan, Chief Investment Officer of Future Generali Life Insurance in 2012, “Given the insurance industry is distinct from other investment funds, as it needs to look at sustainable long-term returns, and keeping in mind the safety and liquidity of the portfolio, it may not be advisable to get into a high-risk, highreturn asset class” 8 . Based on our interactions with insurance companies, the prominent reasons for the low exposure to VCPE funds seemed to be those that can be categorised as business prudence: (i) Insurance is a contract which covers uncertainties. Insurance companies should be able to meet claims of policy holders as and when they occur. For this reason, investments of insurance companies should yield stable returns which are of low risk. (ii) The illiquid nature of VCPE investments is another reason for low exposure by insurance companies. The money invested is locked in for a period of atleast 10 to 12 years, depending on the life of the fund. Although this may not be a big deterrent for life insurance companies, general insurers which usually have one year contracts view this as a liquidity constraint. The balance sheets of general insurance companies depend on year to year movement of assets and liabilities, as compared to that of VCPE funds which are of long gestation. (iii) Provisioning requirements are also an importance reason for the reluctance of the insurance companies. LPs pay asset management fees to GPs every year, which is shown as a deduction from the NAV. This reduction in value should be provided for by the insurance company. Provisions are shown as a deduction from profits, which is against the interests of any company. Since the investment in VCPE funds are well below the regulatory limits, the regulatory norm was not indicated as a constraint. Importance of Insurance firms as LPs Institutional investors like insurance companies are endowed with funds. To put it in perspective, as on March 31, 2013, the total investments of life insurers was Rs. 17.45 lakh crores, while that of non-life insurers was Rs. 1.23 lakh crores 9 . The funds are primarily invested in Government paper. These instruments, albeit safe do not yield much return. By carefully picking the right VCPE, returns over the long term can be enhanced. VCPE funds on their part would prefer to have institutional investors like insurance companies as LPs, rather than have multiple retail investors like High Networth Individuals, as serviceability and management of LPs becomes easier. Moreover, increased participation by Indian insurance firms would increase the pool of domestic capital, which in turn help the VCPE funds to make investments that can have a strong relevance in Indian context. In order to get increased participation from the insurers, the VCPE funds should also understand the investment preferences of these companies while approaching them for fund commitment. 18
During our interview, a large public sector insurance company indicated that the following factors play an important role in their investment decisions. Insurance companies like any other class of LP look at a variety of factors before choosing the fund to invest in. It becomes all the more important in the case of insurance companies, as they are bound by IRDA regulations. The most important factor is the background of the fund and quality of the team, as this determines the future of the investment. For this purpose, the track record and past performance of the fund is analyzed. The focus area of the fund and industry oriented operational expertise become critical evaluation parameters. IRDA has specified in the regulations that the infrastructure, SME and social sectors should be the key areas of focus. The fee charged by the fund manager is another criterion which is considered. Insurance companies also look at other investors in the fund - better the reputation of investors, higher the comfort factor for the insurance company. Outlook Insurance firms, particularly, life insurance firms manage long term funds, which would be ideal for investment in VCPE asset class. However, because of the nature of the VCPE asset class, insurance firms do not actively invest in this category. Indian insurance companies follow the same conservative approach that is seen internationally, and the allocation to the VCPE asset class is even lower. Under-allocation to PE asset class is also not specific to India, and it seems a fairly common trend internationally as shown by the Preqin survey. Even, if the insurance companies invest close to the stipulated regulatory limits, there would be substantial domestic capital available for the VCPE firms. Our interactions with the insurance firms and analysis indicated that insurance firms would continue to be a "reluctant bride" in embracing VCPE as an asset class. It is upto the VCPE firms to come out with innovative fund structures that can address some of the concerns of the investment managers of the insurance firms so as to be able to increase the allocation to this asset class. • Notes 1 “Prequin Special Report: Insurance Companies Investing in Private Equity” available at https://www.preqin.com/docs/reports/Preqin_Special_Report_Insurance_Companies_Investing_in_Private_Equity. pdf 2 “India Private Equity Report 2013”, Bain & Company available at http://www.bain.com/publications/articles/indiaprivate-equity-report-2013.aspx 3 IRDA - “Investment in Venture Fund - Reg”, INV/CIR/007/2003-04 dated December 15, 2003 4 IRDA - INV/CIR/019/2008-09 and “IRDA (Investment) (Fourth Amendment) Regulations, 2008”, INV/CIR/008/2008- 09 dated August 22, 2008 5 IRDA - “Investment in Venture Funds - Clarification”, IRDA/F&I/CIR/INV/203/2011 dated August 30, 2011 6 IRDA - “Permission of Insurers to invest in Category I Alternative Investment Funds”, IRDA/F&I/CIR/INV/054/03/2013 dated March 18, 2013 7 IRDA - “Permission to Insurers to invest in Category I & II Alternative Investment Funds (AIFs)”, IRDA/F&I/CIR/INV/172/08/2013 dated August 23, 2013 8 “Insurers, pension firms should invest in VC funds”, available at http://www.businessstandard.com/article/finance/-insurers-pension-firms-should-invest-in-vc-funds-112083000653_1.html accessed on August 31, 2014 9 IRDA Annual Report 2012-13, Table 1.46, Pg 53 available at: http://www.policyholder.gov.in/uploads/CEDocuments/Annual%20Report%202012-13.pdf 19
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