Insurance firms can now park money in PE funds

Insurance Regulatory and Development Authority (IRDA) has opened the door for life insurance and general insurance companies to invest in private equity funds.

The insurance regulator said that companies in the sector can now even invest in Category II funds under SEBI (Alternative Investment Funds) Regulations, 2012. Earlier this year, the regulator only allowed investment in Category I AIFs, which include venture capital funds and infrastructure funds.

According to TVS Capital's chairman Gopal Srinivasan, assuming an average of 4 per cent allocation to alternative investment by insurance firms, this measure could open up capital pool of over $10 billion for PE/VC funds.

Globally, private equity funds raise most of their capital from insurance companies and pension funds. While insurance firms account for 10-15 per cent of the global alternative asset pool, pension funds represent 40-45 per cent.

With the current measure by IRDA, this could potentially open a very significant rupee capital pool for the industry.

"I think it's a breakthrough for the direction in which the industry is heading. Insurance is one of the most important pool of capital and with IRDA giving such clear guidelines, it could be a forerunner for other institutions like Pension Fund Regulatory and Development Authority (PFRDA) and charitable institutions," said Srinivasan whose TVS Capital has raised over Rs 1,100 crore from domestic investors.

By assuming a 10 per cent allocation, employee provident fund (EPF) and public provident fund (PPF) could bring in $35 billion while charitable institutions another $7.5 billion, according to TVS Capital.

HNIs/UHNIs, who already invest in the asset, have potential to invest up to $135 billion assuming the 10 per cent allocation mark.

What new guidelines say

IRDA permitting Category II funds to raise money from insurance firms also comes with certain restrictions. In Category II, at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Category II includes private equity funds, real estate and debt funds.

Also, the IRDA note by Radhakrishnan Nair, member (finance and investment), said insurers are not permitted to invest in AIFs which have the nature of funds of funds and leverage funds.

Under the new norms, a life insurance company can invest 3 per cent of a respective fund in venture capital/AIF asset class while a general insurance company can invest 5 per cent of its investment assets. For both types of insurers, exposure should not be more than 10 per cent of the size of AIF/venture fund or over 20 per cent of insurers’ total AIF portfolio, whichever is lower.

Also while reporting, the investments in Category I AIF shall be shown under category code ‘OAFA’ and Category II AIF shall be shown under category code ‘OAFB’ by the insurers. The existing investments made in AIFs and shown under ‘OVNF’ shall be reclassified under the above two category codes.


According to Srinivasan, the clearly defined policy from insurance for the categories of AIFs also recognises the asset class in the long run.

Earlier, while allowing investments in Category I Alternative Investment Funds in March, IRDA had said that they are permitted under the head ‘Other Investments’ where only 1 per cent of assets could be allocated.

An immediate impact of the move would removal of any ambiguity regarding investments by insurers in AIF funds. Players like Life Insurance Corporation (LIC) and  General Insurance Corporation (GIC) have been active investors in private equity and venture capital funds.

"Over the six months, LIC has come down drastically on investments in venture capital and private equity funds. Insurers wanted more clarity on how the IRDA will approach AIFs because of which many commitments could not go through but this could open up the process again," said one PE executive who did not wish to be named.

(Edited by Joby Puthuparampil Johnson)

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