China giants put their best fund forward

Hu Zhanghong, CEO of CCB International (Holdings) Ltd, the investment banking arm of China Construction Bank, publicly stated that the bank is on the verge of launching a $1 billion private equity fund to be based out of Hong Kong. On the same day, Liu Lefei, chairman of the CITIC Private Equity Funds Management Co. unit at Shanghai-listed CITIC Securities, China’s largest listed brokerage firm and an arm of PRC investment conglomerate CITIC Group, announced that it is about to close its first RMB-denominated private equity fund at RMB9 billion ($1.3 billion), and may raise further funds offshore in future.

Meanwhile, Adveq Holding, parent of leading private equity fund-of-funds manager Adveq Management, announced the formation of an investment management JV company in the northeastern port city of Dalian in Liaoning Province, claimed to be “the first non-government private equity fund of funds investment company in the People’s Republic of China.”

New kids on the China block

Sources at CITIC Securities confirmed to AVCJ that the new RMB fund will be managed by CITIC Private Equity Funds Management. Liu stated publicly that the new fund will target investments in financial services, consumer, raw materials and manufacturing sectors. The former CIO at China Life Insurance, Liu left his previous post in January to chair CITIC Private Equity, which was established in June 2008 after formal approval from the National Development & Reform Commission (NDRC). China Life, the world’s second largest insurer behind AIG, has a c.15.8% stake in CITIC Securities.

CITIC Private Equity is separate from CITIC Capital, the established PRC alternative investment firm owned by the China Investment Corporation (CIC) and CITIC Group, through CITIC global flagship CITIC International Financial Holdings and Hong Kong-listed industrial conglomerate CITIC Pacific.

The new CCB International fund, meanwhile, will only invest in financial institutions, according to Hu. It is apparently about to invest in HSBC-invested PRC lender Bank of Shanghai, targeting a 15% stake – though how this squares with the stage of fundraising remains to be confirmed. Bank of Shanghai is reportedly seeking a Shanghai listing, advised by Goldman Sachs Gaohua Securities. Hu also indicated that the fund was contemplating an investment in Huatai Insurance Co., China’s first registered nationwide joint-stock property insurance group.

CCB International is already raising another specialist private equity fund, its pre-IPO healthcare investment platform, the CCBI Healthcare Fund (see AVCJ Sep 15), reportedly targeting some RMB2.6 billion ($380 million). PRC reports indicate that CCB International may seek to raise a total of six RMB vehicles, comprising up to RMB10 billion ($1.46 billion), in addition to the new Hong Kong fund.

Justin Dolling, Partner and leader in fund formation at Kirkland & Ellis International in Hong Kong, sees appetite for returns, rather than strategic priorities, driving certain PRC financial institutions to raise funds. “If the institution is purely a financial investor, then it will be mainly focused on deriving financial returns.” However, he also sees institutions, particularly those that are strategic investors, launching funds “to put in place infrastructure to facilitate an organized investment program, but more importantly, to develop the skills required to identify and execute investments.”

All of the CCB International funds, and the new CITIC Private Equity fund, are seen as part of an official strategy to widen the domestic options for PRC capital, while diversifying banking businesses away from their traditional lending revenue base. Also, sources indicate that such funds will tap both institutional and individual HNW clients of the parent groups for commitments. Xu Xiaolin, MD of CCB International Wealth Management Ltd., was the source for the reports about the group’s RMB funds.

Dolling also sees prospects of more PRC JVs with international players. “A lot of these ventures are structured as JVs with financial institutions or private equity houses, whereby the-cash rich SOE or industry player is looking to team up with a sponsor that brings execution and deal sourcing experience to the table. This provides the SOE with an opportunity to develop technical skills, or learn a new industry or jurisdiction, without having to bring the resources in-house (which may be difficult or impossible).”

Doings in Dalian

Adveq’s JV in Dalian, meanwhile, is at letter of intent stage, with the $4 billion Swiss manager forming a 50:50 structure with local investment management company Dalian United Holding. The new JV will focus on “the formation of RMB-denominated private equity fund of funds and related service activities in China.”

“Adveq has been pioneering private equity fund of funds investment management in Europe, North America and across Asia Pacific,” Bruno Raschle, Adveq Holdings’ chairman, said publicly. “Now we are looking forward to do the same in China”

Adveq has been investing in China since 1998, opening its Beijing office in 2002, and Raschle is known to advocate the knowledge transfer contribution that Western private equity groups can make in building the PRC market, and has also cited his many China visits and meetings with local fund managers. Adveq has had an MOU with the government of Shanghai’s Pudong district since 2007.

Adveq declined to comment further on the new fund to AVCJ.

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• Topics
• Greater China
• Fund-of-funds
• Financials
• Buyout
• Fundraising