Investment: Sovereign Fund with a Reputation at Stake
China Investment Corp. has earned a reputation for investment clout and global reach. But can it build a name for success?
Li Qing, Caijing 1 February 2009
China’s sovereign wealth fund has a reputation for deep pockets and major market plays.
Since its inception in September 2007 with US$ 200 billion in registered capital, the fund known as China Investment Corp. (CIC) has funnelled about US$ 94 billion into overseas investments – an amount exceeded only by sovereign wealth funds operated by Singapore and countries in the Middle East.
Another side of CIC’s reputation is less noteworthy: Some of its largest and most visible investments have, at least on paper, lost hundreds of millions of dollars. And that’s raised a basic question: Why?
One explanation is that CIC, though no fault of its own was at the wrong place at the wrong time. The global financial crisis struck within months of the fund’s initial market moves.
But additional explanations are linked to personnel and other structural factors. Many of CIC’s investment managers are relatively inexperienced for the multi-billion dollar tasks at hand. Moreover, the fund’s salaries and office culture have been cited as possible barriers to success.
The world’s financial markets have weakened considerably since CIC was established, after the Ministry of Finance issued 1.55 trillion yuan in bonds to buy US$ 200 billion from China’s foreign exchange reserves, which in turn was used to capitalize the fund. Most investors in 2007, including CIC, were unaware that a huge bubble was about to burst.
Even before the fund’s official launch, CIC invested US$ 3 billion in the U.S. private equity fund Blackstone Group. The May 2007 investment was for a 10 percent stake in the group at US$ 29.60 per share. The deal closed just before Blackstone launched an initial public offering on the New York Stock Exchange at US$ 31 per share.
Since then, the value of Blackstone stock has plummeted. But that didn’t stop CIC from investing another US$ 150 million in October, raising its Blackstone stake to 12.5 percent.
In December 2007, CIC bought US$ 5 billion worth of convertible securities in the U.S. investment bank Morgan Stanley. An agreement says the securities can be exchanged for stock worth between US$ 48.07 and US$ 57.68 per share in 2010. Due to the financial crisis, however, the fair market value of this investment has plunged.
CIC’s directors are trying to imitate commercial operations.
“In terms of most of our systems, we have emulated successful sovereign wealth funds,” said Wang Jianxi, the fund’s deputy general manager. “Although we cannot do everything exactly the same, at least we can follow a commercial operational model.”
Obviously, however, the operation model did not protect the fund from enormous paper losses. So a question remains: Might other structural aspects need tweaking to protect CIC’s investments in the future?
Some say improving CIC’s investment track record may require a second look at the fund’s personnel structure. Most members of the management team are former government finance officials with little investment experience.
Currently, seven executives oversee day-to-day operations and investment decisions. These include a former executive vice minister of finance, Lou Jiwei; a former vice chairman of the National Council for the Social Security Fund, Gao Xiqing; a former vice minister of finance, Zhang Hongli; and a former director general of the investment department at the National Development and Reform Commission.
Altogether, about 50 of CIC’s 210 staff members are responsible for investments, and a good number have overseas experience. But the majority joined CIC after leaving junior-level jobs at international financial institutions. And not one had earned a big name for investment prowess before coming to CIC.
Rather, CIC investment managers have a reputation for pride. “Apparently, they are not familiar with the market,” said an investment banker who did business with CIC. “But they tend to be proud about holding so much capital.”
Some say CIC’s personnel structure has been limited by salary constraints.
Twice since its formation, the fund has tried to recruit talent with global financial and investment experience, and the job searches initially went well. But some candidates were scared off by relatively low compensation offers. Caijing learned that the annual salary for a senior position at CIC is a mere US$ 100,000, far below the international standard.
Although a few candidates decided to take CIC offers, the turnover rate has been high. “CIC could easily become a West Point” training ground with a reputation that attracts ambitious financial specialists “who just want the name,” said an insider. “What is worrying is that we let junior staffers make big investment decisions.”
A related issue is workplace culture. Another CIC insider blamed low efficiency levels at the fund to the fact that a high percentage of staffers come from government agencies, and are accustomed to a bureaucratic atmosphere. For example, as at government offices, getting a signature at CIC may take days.
CIC’s investment woes have raised questions about several other structural factors, including its lack of legal framework. The National People’s Congress, China’s top legislature, had no say in the fund’s formation, even though constitutions in other countries require legislative approval for sovereign wealth funds.
Norwegian lawmakers, for example, play a crucial role in the Norway’s sovereign wealth fund, the Norges Bank Investment Management. “The Norwegian government decides the risk level for NBI and sets overall strategy,” said the fund’s former CEO Knut N. Kjaer. “It will never let NBI make those decisions.”
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Investment: Sovereign Fund with a Reputation at Stake
China Investment Corp. has earned a reputation for investment clout and global reach. But can it build a name for success?
Li Qing, Caijing
1 February 2009
China’s sovereign wealth fund has a reputation for deep pockets and major market plays.
Since its inception in September 2007 with US$ 200 billion in registered capital, the fund known as China Investment Corp. (CIC) has funnelled about US$ 94 billion into overseas investments – an amount exceeded only by sovereign wealth funds operated by Singapore and countries in the Middle East.
Another side of CIC’s reputation is less noteworthy: Some of its largest and most visible investments have, at least on paper, lost hundreds of millions of dollars. And that’s raised a basic question: Why?
One explanation is that CIC, though no fault of its own was at the wrong place at the wrong time. The global financial crisis struck within months of the fund’s initial market moves.
But additional explanations are linked to personnel and other structural factors. Many of CIC’s investment managers are relatively inexperienced for the multi-billion dollar tasks at hand. Moreover, the fund’s salaries and office culture have been cited as possible barriers to success.
The world’s financial markets have weakened considerably since CIC was established, after the Ministry of Finance issued 1.55 trillion yuan in bonds to buy US$ 200 billion from China’s foreign exchange reserves, which in turn was used to capitalize the fund. Most investors in 2007, including CIC, were unaware that a huge bubble was about to burst.
Even before the fund’s official launch, CIC invested US$ 3 billion in the U.S. private equity fund Blackstone Group. The May 2007 investment was for a 10 percent stake in the group at US$ 29.60 per share. The deal closed just before Blackstone launched an initial public offering on the New York Stock Exchange at US$ 31 per share.
Since then, the value of Blackstone stock has plummeted. But that didn’t stop CIC from investing another US$ 150 million in October, raising its Blackstone stake to 12.5 percent.
In December 2007, CIC bought US$ 5 billion worth of convertible securities in the U.S. investment bank Morgan Stanley. An agreement says the securities can be exchanged for stock worth between US$ 48.07 and US$ 57.68 per share in 2010. Due to the financial crisis, however, the fair market value of this investment has plunged.
CIC’s directors are trying to imitate commercial operations.
“In terms of most of our systems, we have emulated successful sovereign wealth funds,” said Wang Jianxi, the fund’s deputy general manager. “Although we cannot do everything exactly the same, at least we can follow a commercial operational model.”
Obviously, however, the operation model did not protect the fund from enormous paper losses. So a question remains: Might other structural aspects need tweaking to protect CIC’s investments in the future?
Some say improving CIC’s investment track record may require a second look at the fund’s personnel structure. Most members of the management team are former government finance officials with little investment experience.
Currently, seven executives oversee day-to-day operations and investment decisions. These include a former executive vice minister of finance, Lou Jiwei; a former vice chairman of the National Council for the Social Security Fund, Gao Xiqing; a former vice minister of finance, Zhang Hongli; and a former director general of the investment department at the National Development and Reform Commission.
Altogether, about 50 of CIC’s 210 staff members are responsible for investments, and a good number have overseas experience. But the majority joined CIC after leaving junior-level jobs at international financial institutions. And not one had earned a big name for investment prowess before coming to CIC.
Rather, CIC investment managers have a reputation for pride. “Apparently, they are not familiar with the market,” said an investment banker who did business with CIC. “But they tend to be proud about holding so much capital.”
Some say CIC’s personnel structure has been limited by salary constraints.
Twice since its formation, the fund has tried to recruit talent with global financial and investment experience, and the job searches initially went well. But some candidates were scared off by relatively low compensation offers. Caijing learned that the annual salary for a senior position at CIC is a mere US$ 100,000, far below the international standard.
Although a few candidates decided to take CIC offers, the turnover rate has been high. “CIC could easily become a West Point” training ground with a reputation that attracts ambitious financial specialists “who just want the name,” said an insider. “What is worrying is that we let junior staffers make big investment decisions.”
A related issue is workplace culture. Another CIC insider blamed low efficiency levels at the fund to the fact that a high percentage of staffers come from government agencies, and are accustomed to a bureaucratic atmosphere. For example, as at government offices, getting a signature at CIC may take days.
CIC’s investment woes have raised questions about several other structural factors, including its lack of legal framework. The National People’s Congress, China’s top legislature, had no say in the fund’s formation, even though constitutions in other countries require legislative approval for sovereign wealth funds.
Norwegian lawmakers, for example, play a crucial role in the Norway’s sovereign wealth fund, the Norges Bank Investment Management. “The Norwegian government decides the risk level for NBI and sets overall strategy,” said the fund’s former CEO Knut N. Kjaer. “It will never let NBI make those decisions.”
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