The Chinese government may have lost billions of dollars during the financial crisis when private equity investments vanished.
Li Qing and Cao Zhen, Caijing 5 January 2009
The new director of the alternative investment division at a Chinese sovereign wealth fund called a series of meetings in mid-December to hear out his frantic staff.
Zhou Yuan tried to ease their fears. “Take it easy,” he cooed.
Yet no amount of soothing words from the new boss could relieve the staff’s stress over huge investment losses tied to overseas private equity funds and the global financial meltdown.
Zhou’s unit, which handles about half of all foreign investments made by the US$ 200 billion sovereign fund China Investment Corp. (CIC), may have lost billions of dollars in recent months.
And CIC is not the only government agency hit hard by PE losses. Also licking its wounds is the State Administration of Foreign Exchange (SAFE), which may have watched billions of dollars disappear.
Zhou is a member of a new management team at the alternative investment division who was mustered into service after the bottom fell out. He replaced the department’s former director Li Peiyun, who was moved to a presumably less risky job as a researcher for the State Council, China’s cabinet.
CIC recently lost an undetermined percentage of a US$ 3.2 billion investment in PE fund JC Flowers. The loss was triggered by the steep devaluation of shares in Germany’s second largest commercial mortgage firm Hypo Real Estate (HRE), whose stock plummeted 90 percent in recent months. JC Flowers had bought about 450 million euro in HRE stock last June.
The JC Flowers move was one of only a few made by the alternative investment division so far revealed to the public. Also publicized was its US$ 800 million investment in a Morgan Stanley real estate fund. Other activities have been kept under wraps.
According to a source familiar with the HRE transaction, CIC provided most of the capital for the stock investment through the fund. JC Flowers had contributed 10 percent of the fund’s cash, while CIC provided 80 percent and other investors covered the rest.
In agreeing to be its partner, CIC had demanded JC Flowers take a full 10 percent stake in their fund, even though fund managers usually put up only 1 or 2 percent.
Caijing learned CIC did not get involved in day-to-day management of the fund, although the Chinese were kept abreast of all transactions. It’s unclear whether CIC had a direct role in the HRE stock buy, although the Chinese involvement apparently had been under the radar.
“German companies normally do not agree to deals with special entities such as CIC because of its (government) identity,” the source said. “But because JC Flowers managed the fund and acquired less than 10 percent of the German company, there was no hurdle.”
Meanwhile, SAFE’s recent losses through a foreign PE fund were tied to the demise of U.S. savings bank Washington Mutual (WaMu).
The Chinese agency, which manages the country’s US$ 1.9 trillion in foreign reserves, had invested in early 2008 about US$ 2.5 billion in Texas Pacific Group (TPG). TPG bought 65 percent of WaMu in April, a few months before the bank collapsed.
According to an insider who spoke under condition of anonymity, SAFE’s injection in TPG was considered experimental. Moreover, the amount represents a minor portion of the agency’s investment portfolio.
Shan Weijian, an executive partner at TPG, once told Caijing that the WaMu investment seemed well timed. It was also aimed at acquiring some management leverage at the bank.
It’s not clear how much of SAFE’s US$ 2.5 billion in TPG went toward WaMu. But the Chinese may have lost all of their investment.
In the wake of the losses, soul-searching and management shuffling got under way at China’s investment arms.
“We are adjusting our asset allocation and investment portfolio,” the CIC source said.
Launched with US$ 200 billion in September 2007, CIC initially took an aggressive investment strategy. It allocated 15 percent for bond investments, 35 to 40 percent for equity, and the rest for alternative asset investments such as PE funds.
“While reflecting on the investment losses, the central government should set principles for risks and return,” and create a basic mechanism for assets allocation, said an investment banker who refused to be named. “State-owned investment institutions should go through a process of building a professional institution.”
Moreover, CIC is turning to new experts. It created a new Strategic Asset Allocation & Research Department headed by Zhao Haiying, a University of Maryland-educated economist. Zhao formerly served at the China Securities Regulatory Commission and taught at business schools in Hong Kong.
The alternative investment division’s new chief Zhou also brings experience to the table. He previously served at various financial institutions including UBS, where he worked as an executive director and head of UBS China from 1994 to ‘98.
Meanwhile, China’s former chief representative at JC Flowers, Yi Changneng, was moved to a new government job: research director at the People’s Bank of China.
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PE Losses Sting Chinese Investment Arms
The Chinese government may have lost billions of dollars during the financial crisis when private equity investments vanished.
Li Qing and Cao Zhen, Caijing
5 January 2009
The new director of the alternative investment division at a Chinese sovereign wealth fund called a series of meetings in mid-December to hear out his frantic staff.
Zhou Yuan tried to ease their fears. “Take it easy,” he cooed.
Yet no amount of soothing words from the new boss could relieve the staff’s stress over huge investment losses tied to overseas private equity funds and the global financial meltdown.
Zhou’s unit, which handles about half of all foreign investments made by the US$ 200 billion sovereign fund China Investment Corp. (CIC), may have lost billions of dollars in recent months.
And CIC is not the only government agency hit hard by PE losses. Also licking its wounds is the State Administration of Foreign Exchange (SAFE), which may have watched billions of dollars disappear.
Zhou is a member of a new management team at the alternative investment division who was mustered into service after the bottom fell out. He replaced the department’s former director Li Peiyun, who was moved to a presumably less risky job as a researcher for the State Council, China’s cabinet.
CIC recently lost an undetermined percentage of a US$ 3.2 billion investment in PE fund JC Flowers. The loss was triggered by the steep devaluation of shares in Germany’s second largest commercial mortgage firm Hypo Real Estate (HRE), whose stock plummeted 90 percent in recent months. JC Flowers had bought about 450 million euro in HRE stock last June.
The JC Flowers move was one of only a few made by the alternative investment division so far revealed to the public. Also publicized was its US$ 800 million investment in a Morgan Stanley real estate fund. Other activities have been kept under wraps.
According to a source familiar with the HRE transaction, CIC provided most of the capital for the stock investment through the fund. JC Flowers had contributed 10 percent of the fund’s cash, while CIC provided 80 percent and other investors covered the rest.
In agreeing to be its partner, CIC had demanded JC Flowers take a full 10 percent stake in their fund, even though fund managers usually put up only 1 or 2 percent.
Caijing learned CIC did not get involved in day-to-day management of the fund, although the Chinese were kept abreast of all transactions. It’s unclear whether CIC had a direct role in the HRE stock buy, although the Chinese involvement apparently had been under the radar.
“German companies normally do not agree to deals with special entities such as CIC because of its (government) identity,” the source said. “But because JC Flowers managed the fund and acquired less than 10 percent of the German company, there was no hurdle.”
Meanwhile, SAFE’s recent losses through a foreign PE fund were tied to the demise of U.S. savings bank Washington Mutual (WaMu).
The Chinese agency, which manages the country’s US$ 1.9 trillion in foreign reserves, had invested in early 2008 about US$ 2.5 billion in Texas Pacific Group (TPG). TPG bought 65 percent of WaMu in April, a few months before the bank collapsed.
According to an insider who spoke under condition of anonymity, SAFE’s injection in TPG was considered experimental. Moreover, the amount represents a minor portion of the agency’s investment portfolio.
Shan Weijian, an executive partner at TPG, once told Caijing that the WaMu investment seemed well timed. It was also aimed at acquiring some management leverage at the bank.
It’s not clear how much of SAFE’s US$ 2.5 billion in TPG went toward WaMu. But the Chinese may have lost all of their investment.
In the wake of the losses, soul-searching and management shuffling got under way at China’s investment arms.
“We are adjusting our asset allocation and investment portfolio,” the CIC source said.
Launched with US$ 200 billion in September 2007, CIC initially took an aggressive investment strategy. It allocated 15 percent for bond investments, 35 to 40 percent for equity, and the rest for alternative asset investments such as PE funds.
“While reflecting on the investment losses, the central government should set principles for risks and return,” and create a basic mechanism for assets allocation, said an investment banker who refused to be named. “State-owned investment institutions should go through a process of building a professional institution.”
Moreover, CIC is turning to new experts. It created a new Strategic Asset Allocation & Research Department headed by Zhao Haiying, a University of Maryland-educated economist. Zhao formerly served at the China Securities Regulatory Commission and taught at business schools in Hong Kong.
The alternative investment division’s new chief Zhou also brings experience to the table. He previously served at various financial institutions including UBS, where he worked as an executive director and head of UBS China from 1994 to ‘98.
Meanwhile, China’s former chief representative at JC Flowers, Yi Changneng, was moved to a new government job: research director at the People’s Bank of China.
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