History shows that PE is set to benefit from China’s spend

Just this month, the Chinese government announced that it would commit between $100-$200 billion in top-up capital to sovereign wealth fund China Investment Corporation (CIC). CIC launched in September 2007 with the issuance of special bonds worth RMB1.55 trillion ($233.5 billion) by the Ministry of Finance. Virtually all of the capital has been committed. CIC has authorization to invest its capital overseas if the right opportunities arise, and is likely going continue with the same investment strategy following the government's injection.

CIC has built a diversified private equity portfolio that includes tech-focused VCs, investment banks and global fund of funds managers. In February of last year, CIC made its foray into the secondary market, equally investing $1.5 billion in three specialist secondary funds - Lexington Partners, Pantheon Ventures and Goldman Sachs - who will invest the capital on CIC's behalf. That same month, US corporate VC Intel Capital announced a joint innovation investment initiative with CIC, intended to identify and support investments across multiple technology sectors, including software, mobile TMT, cleantech and home digital, primarily outside China.

More such opportunities are sure to become available, and not only through direct private equity investments of this vein. Just this week, news broke that the China Development Bank (CDB) - which has largely made investments in conjunction with China's national interests - submitted filings to purchase a minority stake in US-based TPG Capital, creating an easy path to overseas investment opportunities. TPG, in the form of Newbridge Capital, was one of the earliest private equity investors to enter the China market. The years of experience is now paying off for the buyout giant.

Likewise, the State Administration of Foreign Exchange (SAFE) invested more than $2.5 billion in TPG's global flagship fund in 2008 in what was at the time touted as SAFE's largest investment in a PE firm. CIC in the past has also bought stakes in Apax Partners and Blackstone.

In terms of where China's capital will flow in the future, AVCJ sources say that larger firms with brand names (and track records) will continue to attract attention. Buyout funds, which have the capacity to absorb and invest larger tranches of money, is favored by China's sovereign wealth funds and banking institutions.

Yet even those who have the opportunity to receive direct funding from China may opt out. In July 2010, Pantheon retracted its initial agreement to manage $500 million of CIC's capital for secondary investments, reportedly on the grounds of unfavorable terms. Since then, Goldman Sachs and Lexington Partners agreed to take up half each of the Pantheon allocation.

Newly launched RMB funds have also been the result of JVs between PE firms and local government municipalities, which may also raise red flags for LPs who question how investments fit into funds' wider picture. Morgan Stanley's RMB1.5 billion ($225 million) debut fund launched this week is 80% owned by the US investment bank, and with the remainder held by a trust belonging to the Hangzhou government.

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• Topics
• Greater China
• Renminbi fund
• CIC
• TPG Capital
• Goldman Sachs
• Morgan Stanley