Select insurers may go for PE investments

Depends on risk-taking appetite and size of funds, say insurers

The Insurance Regulatory and Development Authority (Irda) has allowed insurers to invest in category-II alternative investment funds (AIFs), including private equity funds, debt funds and funds of funds. While insurers agree this has resulted in more options, as category-I AIFs were restrictive, not many are looking at immediately investing in these categories.

Irda, however, said under category-II AIFs, at least 51 per cent of the funds should be invested in either infrastructure entities or small and medium enterprises (SME) or venture capital undertakings or social venture entities.

Category-I AIFs include venture capital funds, SME funds, social venture funds, infrastructure funds and other specified AIFs. These funds are close ended, don’t engage in leverage and follow the investment restrictions prescribed for each category.

Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance, said currently, insurers weren’t looking at AIFs. “Category-II funds such as private equity have a higher rate of return and higher risks. Therefore, only insurers in products such as long-term traditional plans, with a higher risk appetite and confidence about the cash flow, would go for these investments,” he said.

He, however, added Irda’s move had opened up a new segment for insurers, as globally, insurers didn’t have to follow any direction on their investments in different segments, as well as the quantum of the investments.

In such countries, insurers were expected to be prudent in investment decisions, while keeping in mind the nature of risks and rates of returns. Pradhan said returns from PE funds could be two-10 per cent higher than returns from the equity market.

Experts said for private equity funds, returns could be as high as 15 per cent, if the investment was for five-seven years. Currently, government bonds offer eight-nine per cent returns, while ‘AA’-rated bonds, on an average, offer 11 per cent. The primary beneficiaries of the regulator’s announcement could be large insurance companies that have huge funds under the traditional portfolio. A K Sridhar, chief investment officer, IndiaFirst Life Insurance, said, “Only large insurance entities that can handle these risks will look forward to investing in these funds,” he said.

Last year, Life Insurance Corporation invested Rs 2 lakh crore in segments such as government securities, bonds, infrastructure, debentures and equity.

This year, LIC is planning to invest a total of Rs 2.25 lakh crore, of which about 15-20 per cent would be in equity and the rest would be in debt and other areas.

 

In March 2013, Irda permitted insurers to invest in Category I Alternative Investment Funds (AIF) and clarified that such investments would be restricted to Infrastructure and SME sectors. Pursuant to the issue of this Circular, it received several representations from various stakeholders including large insurance companies to expand the scope of the AIF and include Category II AIF also. This matter was referred to the Expert Committee on Investment constituted by the Authority and the Expert Committee was of the view that the insurance companies should be allowed to invest in Category II AIF also.

 

However, some insurers are optimistic in this investment, owing to a good track record and better funds in this category. Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance said, "IRDA allowing insurers to invest in category II funds is definitely a positive move. By this move, insurers have a wider investment opportunity in the form of private equity and debt funds. While, we could not think of investing in any Category I fund as the space was too restrictive, we are positive about  Category II segment funds as there are a good number of funds with long track record. We will look to invest in some of these funds."

 

According to the Irda rules, the overall exposure to Venture Funds and AIFs put together for life insurers is 3 per cent of respective fund and for general insurers, it is 5 per cent of investment assets. In terms of exposure to single AIF/Venture Fund, it is 10 per cent of AIF/Venture Fund size or 20 per cent of Overall Exposure, whichever is lower, for both life and general insurers. However, the 10 per cent limit would be 20 per cent in case of an infrastructure fund.