Public sector general insurer Oriental Insurance Company of India (OICL) has set the trend by investing in venture capital (VC) funds floated by financial institutions.

A senior director of OICL said it had made an initial investment of Rs 120 crore in the VC funds floated by IDFC, IDBI and ICICI focused on infrastructure. The officials said based on performance of VC investments, it would increase the investments. The performance benchmark, the officials said, entailed a minimum annualised return of at least 18 per cent.

If the investments were able to match up to the return expectations, OICL is prepared to increase investments in VC and private equity funds. “Our criterion is that funds, VC or private equity funds, be floated by reputed institutions or institutions that have a track record for delivering returns,” the officials said.

The returns sought by OICL is at present far lower than private sector and foreign VC/PE fund expectations. Accel Partners, US based venture capital fund has return expectations that are inflation adjusted. Accel’s partner, Shekar Kirani said, “Our return expectations are inflation adjusted. That means we need a minimum inflation adjusted return of at least 12 per cent.” The expectation effectively translates into an annualised nominal return of about 22 per cent.

The difference in the return expectations is based on the cost of capital and the risk premiums associated. International capital movements tend to ascribe high-risk premiums to emerging markets like India. Consequently, investor returns tend to be high. However, in case of public sector institutions, cost of domestic capital is lower. Besides, risk premium loaded on investments is also lower.

The OICL official said it was prepared to lock in its investments for as long as 8 years. The caution in keeping the investments low in the VC funds was partly driven by risk aversion. Insurers, at present, invest only in securities and corporates that have a minimum credit rating of ‘AA’. At present, only some of the top corporates in the country have those credit ratings.

But almost all the insurers have stayed risk averse, in view of tight guidelines from Insurance Regulatory and Development Authority. At least 55 per cent of insurer funds are invested in government securities. The remaining 45 per cent have been invested corporate and other securities that met their minimum credit rating. With investment security remaining the primary concern, General insurers investments have largely been in government securities, and public sector debt. General insurers, including United India Insurance Company, New India Assurance Company and National Insurance Company have preferred to keep their funds largely government, corporate and state government securities.

Besides, PSU insurers have also stopped direct participation in consortium loans for project funding. Instead, PSU insurance officials said that they preferred to securitised debt, bonds either in the secondary markets or in the primary markets including private placements. The investments included tier two debt papers floated by public sector paper that offered coupons over 9.25 per cent. But bank bonds have suddenly become scarce in the primary and secondary markets. Banks have deferred their tier two capital bond issues, in view of the high interest rates. The last bonds floated were floated by the Central Bank of India and IDBI bank in December last year. Both these bonds had coupons of 9.33 and 9.45 per cent, respectively.