Mainland China Experiencing Slowdown in Wealth Fund Direct Deals

With China experiencing a deceleration in economic growth, heightened geopolitical tensions, and rising risks in the country’s traditional financial sector, wealth fund direct investments have slowed down to a crawl in 2016 compared to 2015.

Direct Transactions into Mainland China by Sovereign Wealth Funds – Billions USD

Source: Sovereign Wealth Fund Transaction Database, Extracted February 7, 2017.

Source: Sovereign Wealth Fund Transaction Database, Extracted February 7, 2017.

Even though there is an abundance of institutional investor capital chasing deals globally, the number of suitable opportunities for these large sovereign investors within China shrunk, as well as deal size. This had required both cash-rich wealth funds and pensions to augment on-the-ground resources across Asia. In reality, overseas wealth funds, at times, are competing against adventurous Canadian pensions, deep-pocketed corporate investors, private equity firms and domestic players when it comes to investing in Chinese emerging companies. Lucrative Chinese initial public offerings are competitive.

While overall direct deals made by wealth funds slightly pulled back in 2016, mainland China suffered a significant reduction in incoming direct sovereign investor capital. According to data from the Sovereign Wealth Fund Transaction Database (SWFTD), wealth funds directly invested US$ 4.05 billion in mainland China in 2016 versus US$ 13.16 billion in 2015. In 2014, the figure was US$ 8.096. The United States was beneficiary for 2016 when it came to direct sovereign fund transactions. However, according to SWFI Compass, an RFP and opportunity tracking service, external fund mandates toward mainland China were in demand by both wealth funds and pensions across the United States.

Realignment

Wealth funds are also realigning their Asia portfolios, seeking to lower exposure toward traditional financial institutions, while trying to identify investments in China’s consumer, technology and real estate sectors. In 2015, HIP China Logistics Investments Ltd., a sovereign wealth enterprise of the Abu Dhabi Investment Council (ADIC), kicked in US$ 750 million more toward its joint venture with Prologis Inc. called Prologis China Logistics Venture. Meanwhile, some sovereign funds were selling bank stocks. For example, in early 2017, according to Hong Kong filings, Qatar Investment Authority (QIA) trimmed 3.84 million H shares of Agricultural Bank of China Ltd. The shares were sold at an average price of HK$ 3.26 per share on January 27, 2017. Post-transaction, the QIA has a 11.99% stake in the Agricultural Bank of China from its previous 12% ownership stake.

Despite these headwinds, mainland China is on track to have more initial public offerings from very large Chinese companies. One example is China Reading (also known as Yuewen Group), China’s biggest online publishing and e-book company. China Reading, which is backed by Chinese giant Tencent Holdings, hopes to raise up to US$ 800 million in a 2017 IPO.



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