Carlyle Group, manager of the biggest US buyout fund, will invest US$400 million to buy 24.9 percent of China Pacific Insurance (Group) Co's life insurance business, people familiar with the matter said.

Carlyle will later convert the stake into shares of the parent company to meet demand from China Pacific board members, said the people, who declined to be identified. Washington-based Carlyle changed its offer after China Pacific's board objected, saying the earlier bid would make an initial public offering of China's fourth-biggest insurer more difficult, they said.

US insurer Prudential Financial Inc is teaming with Carlyle to invest in China Pacific in what's the biggest foreign investment in a Chinese insurer by a buyout firm. The companies are attracted by an industry that's growing at an annual pace of 25 percent and had US$52 billion of premiums last year. Foreign companies are restricted from buying more than 25 percent of a Chinese insurer.

"The market is under-penetrated," said Paul Clarkson, an analyst at Standard & Poor's in Hong Kong. "It's an opportunity for foreign companies to get into a market where there's strong potential."

Yang Xiangdong, managing director of Carlyle in Asia, declined to comment. Wang Yong, secretary of the administration department at China Pacific, also declined to comment after a five-hour board meeting on September 5, held at the Pearl Room in the Shanghai International Convention Centre.

Carlyle and New York-based Blackstone Group LP are raising funds for China, where the economy is expanding at more than double the rate of the US. Shares of China Life Insurance Co, the nation's largest insurer, have gained 67 percent since the company first sold shares to the public in December 2003.

Carlyle has invested US$14.3 billion in 414 transactions since 1987, according to its website. The firm was co-founded by former US presidential adviser David Rubenstein. Prudential is the third-largest US insurer.

Carlyle is also offering to buy control of Xuzhou Construction Machinery Co, China's biggest building equipment maker, for US$300 million, according to people familiar with the plan.

China Pacific's life insurance business received an initial offer from Carlyle in March 2004. China Pacific has asked Carlyle to pay more to increase its stake once the Chinese Government allows overseas investors to own more than 25 percent of an insurer, said the people, who attended the September 5 meeting. The price paid for an additional stake would rise by 6 percent a year, up from 4 percent, they said.

Carlyle and Prudential of Newark, New Jersey, plan to increase their stake to 49 percent when Chinese law permits, according to a document related to the sale.

China Pacific's life insurance business was required to have 4.35 billion yuan (US$537 million) of capital to meet policy obligations as of December 31, according to the document. The company needed 9 billion yuan (US$1.11 billion) at that time to meet the requirement because of losses related to policies sold in the 1990s, it said.

Baosteel Group Corp, China's biggest steelmaker, was among the investors that led opposition to Carlyle's original proposal, saying it would delay an IPO and hamper the development of the parent's other businesses, which include property and casualty insurance.

"It's very difficult to get deals done in China and you don't always get good terms," said Tommy Yip, a researcher at the Hong Kong-based Asian Venture Capital Journal, which advises private equity firms on investments. "China Pacific isn't a bad company and investors can reap a good profit when they exit three or four years after it's reorganized."

(China Daily September 8, 2005)