Sovereign Wealth Fund Institute

EIG Global Energy Partners, LLC (EIG), an institutional investor in the global energy sector, has reached a definitive agreement with the China Investment Corporation (CIC). The CIC is in agreement to purchase a minority stake in EIG.  The CIC is an investor in EIG-managed funds.

The China Investment Corporation is betting big on natural resources, energy, and global infrastructure. By investing in an asset manager that specializes in energy and infrastructure, the CIC could potentially learn and benefit from possible expertise and robust deal flow.

Separated in January 2011, EIG was formerly the Energy & Infrastructure Group at Trust Company of the West (TCW). The CIC has also invested in Chesapeake Energy Corporation. In November 2011, Chesapeake sold EIG $500 million of perpetual preferred shares of a newly formed entity, CHK Utica, L.L.C.

In December 2011, the Abu Dhabi Investment Authority purchased 9.9% of Kemble Water Limited, the holding company of Thames Water. The private regulated utility company is responsible for the public water supply and waste water treatment in parts of Greater London, Thames Valley, Surrey, and other areas. The utility is regulated by the Office of Water Services.

The China Investment Corporation (CIC) through a sovereign wealth enterprise (SWE) made its first major move into UK infrastructure buy purchasing an 8.68% stake in Kemble Water.

Earlier, CIC chairman Lou Jiwei indicated the CIC’s interest in European and American infrastructure.

South Africa has been a key investment destination for China due to its natural resources, lower political risk profile compared to other African nations, and growing demographics. In fact, the China-Africa Development Fund has been an active investor in the country. The China Investment Corporation (CIC) will purchase a 25% stake in the Shanduka Group for 2 billion rand (US$ 245 million). Johannesburg-based Shanduka is led by former secretary-general of the ruling African National Congress Cyril Ramaphosa and has investments in McDonald’s franchises and coal. It is an unlisted holding company. Recently, the Shanduka Group gained majority control of a coal venture that it operates with Glencore. It increased its stake in Shanduka Coal from 30% to 50.01%, giving it control. Shanduka’s coal mining operations include Springlake, Middleburg Townlands, and Graspan.

The CIC is buying the shares mostly from Investec and Old Mutual Private Equity. Standard Bank was the exclusive financial advisor for the Shanduka Group.

“This partnership will allow us to jointly explore future investment opportunities in South Africa and other parts of Africa,” Ramaphosa said in the statement regarding the recent transaction.

According to a press release, ” China Investment Corporation (CIC) has completed a set of preparatory work to put China Investment International (Hong Kong) Co., Limited (hereafter referred as “CIC International (Hong Kong)”), a wholly-owned subsidiary of CIC, on course to be a fully functioning institution with senior managers appointed.

CIC International (Hong Kong) will take a market-based approach under the principle of measured progress and professional commitment, in accordance with well-defined investment and risk management strategies guided by its clear mandate.

The primary business of CIC International (Hong Kong) covers equity investment and bond investment on the public market, non public market investment and economic research.

Mr. Fan Kungsheng is appointed as President of CIC International (Hong Kong).”

Source: China Investment Corporation Press Release

Giulio Tremonti

Like other Southern European nations, Italy is suffering from severe sovereign debt issues. The Italian Ministry of Finance met with the China Investment Corporation to discuss possible scenarios. Recently, investors wanted greater returns and drove up the bond auction. Italy is trying to lower soaring interest rates and introduce austerity measures. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Investing in new energy infrastructure is a blossoming area for many sovereign investors. There are numerous risks inherent in these types of projects such as political risk, financing risk, and developmental risk. In the past, the China Investment Corporation (CIC) has invested in AES Corp. stock. AES Corp. and the CIC have partnered strategically and financially. Recently, the CIC and AES Corp have partnered in a Vietnamese infrastructure project. By partnering with the China Investment Corporation and Posco, AES Corp has lowered political risk in the project, since the deal is involving foreign governmental investors.  Vietnam has a growing economy in which energy demand has exceeded supply. Energy generation capacity is trailing behind demand.

After completion this will be the biggest private sector power plant in Vietnam and will set precedence for future foreign investment in Vietnamese infrastructure.

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The press release states, “On 26 July 2011, with the approval of its Board of Directors, China Investment Corporation (CIC) released Annual Report 2010 (hereafter referred to as “annual report”), the third annual report by CIC since its inception.

The annual report, consisted of Overview, Culture and Core Values, Corporate Governance, Investment Strategy and Management, Risk Management, Human Resources, Outreach Activities and 2010 Financials, provides comprehensive information on CIC’s operation and major progress in the year of 2010.

In 2010, CIC reduced its cash holdings as a proportion of total portfolio and further diversified its investment portfolios. The return on its global investment portfolio was 11.7% in 2010 and the cumulative annualized return was 6.4% since its inception.

Mr. Lou Jiwei, Chairman & CEO of CIC said in his message for the annual report that 2010 was a year of substantial growth and accomplishment for CIC. As CIC fully deployed the investible capital in its global portfolio, it continued to develop its organization and build its institutional capabilities. CIC earned a satisfactory return for its shareholder and continued to manage the risk profile of its invested portfolio effectively.”

Read more: China Investment Corporation Press Release

According to the press release, “Semiconductor Manufacturing International Corporation (“SMIC”; NYSE: SMI; SEHK: 0981.HK), China’s largest and most advanced semiconductor foundry, announced today a definitive investment agreement between SMIC and China Investment Corporation (CIC). Under the terms of the agreement, CIC will invest US$250 million in SMIC, acquiring 360,589,053 convertible preferred shares at HK$5.39 per convertible preferred share. After issuance and conversion of the new shares, CIC will own approximately 11.6% of SMIC’s outstanding share capital. The agreement also provides CIC with warrants for investing an additional US$50 million in SMIC on the same terms, and entitles CIC to nominate one member of SMIC’s board of directors.

“We are very pleased with our new partnership with CIC,” said Dr. Jiang Shangzhou, Chairman of SMIC. “Their investment in SMIC provides a source of capital that allows us to take full advantage of our project pipeline. Partnering with CIC is conducive to realizing our development objectives and enhancing our competitive advantage in the international arena. We welcome this investment from CIC.”"

Read more: SMIC Press Release

According to the press release, “CITIC Capital Partners, the private equity arm of CITIC Capital Holdings Limited (“CITIC Capital”), today announces the successful closing of its second Japan buyout fund CITIC Capital Japan Partners II, L.P. (“CCJP II”) and the closing of two new investments, Higashiyama Film Co. Ltd. and Tri-Wall K.K. CCJP II has secured total capital commitments of over JPY18 billion. Similar to its predecessor fund, CCJP II targets buyouts of middle-market Japanese companies, particularly those with substantial operations or growth potential in China.

Mr. Yichen ZHANG, Chief Executive Officer of CITIC Capital, stated: ‘We are delighted by the strong support we have received from both existing and new investors. We believe their support is a validation of the tremendous investment opportunity which exists to assist outstanding Japanese companies in their international expansion, particularly to China. We look forward to continuing to build our Japan franchise and to delivering strong China value-added to our first two investments in this new fund.’”

Read more: CITIC Capital Press Release

Morgan Stanley Real Estate was founded in 1969. In 2006, institutional investors were lining up in droves to invest in Morgan Stanley’s real estate funds (MSREF). In fact, MSREF V generated so much investor demand that it raised almost 4x the amount of the MSREF IV Domestic Fund in 2000. Several of the larger sovereign wealth funds involved in non-strategic investment strategies were allocating even more to core real estate at this time.  High IRRs and portfolio diversification made the investment story real.  Investors were attracted by the hefty IRRs generated by the earlier funds, especially the risky opportunistic real estate funds. For example, the Irish National Pensions Reserve Fund invested in MSREF V (Domestic).[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

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Bloomberg reports, “China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.

“You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today.

Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said. The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.

“We’ve started collecting Zimbabwe notes,” Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent.

He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.”

Read more: Bloomberg

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Bloomberg reports, “China’s private equity industry is “unique” because it’s dominated by the state and will follow a “different path” from overseas peers, said Xie Ping, a vice president at the nation’s $300 billion sovereign wealth fund. Entities that manage private equity in China and those that invest in such funds are primarily state-owned institutions, China Investment Corp.’s Xie said today at an event held by China Development Bank Corp. in Beijing.

The briefing was organized by the nation’s largest policy bank for its introduction of a fund that will invest in private equity. By having government backing, China’s private equity funds can increase the value of Chinese companies in which they invest, Xie said. This is an aspect of the Chinese market that is different from other countries, he said.”

Read more: Bloomberg

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Caijing reports, “The Government of Singapore Investment Corp will become the second-largest share holder of China Investment Capital Corporation (CICC) after it receives a substantial stake from Morgan Stanley for its exit.  The Government of Singapore Investment Corp (GIC), Singapore’s largest global investment vehicle, will become the second-largest share holder of China Investment Capital Corporation (CICC) after it receives a substantial stake from Morgan Stanley for its exit.

The China Securities Regulatory Commission (CSRC) said in a statement that it had on November 26 approved CICC’s application for the shareholding change that involved a stake of more than 5 percent in the company.  The transfer of shareholding is for Morgan Stanley’s exit from CICC, who plans to sell its stake to four institutions including GIC, a source close to the CSRC confirmed.  Sources close to the deal said the deal could be worth up to more than 1 billion U.S. dollars. Morgan Stanley would sell an 11 percent stake of CICC to Texas Pacific Group (TPG) and Kohlberg Kravis Roberts & Co. (KKR), the two private equity funds and the rest would be transferred to GIC and Great Eastern Life Assurance Co, a wholly-owned subsidiary of Great Eastern Holdings Limited which is controlled by Oversea-Chinese Banking Corporation Limited, according to the same sources.

Under completion of the deal, GIC will become the second-largest shareholder of CICC, from its initial holding of 7.35 percent.

Currently, Central Huijin Investment Ltd holds 43.35 percent of stake, Morgan Stanley with 34.3 percent, China National Investment & Guaranty Co., Ltd with 7.65 percent and GIC, Mingly Corporation with 7.35 percent each, the CICC said on its website.”

Read more: Caijing

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A number of sovereign wealth funds are lowering allocation from bonds to more risky, illiquid assets, such as direct investment in companies.  Their position sizes have increased and they are now providing more capital for public and private companies across various industries.  SWFs have made generous profits from investing in direct investment / PIPE investments in numerous industries such as natural resources, materials, real estate, financial institutions, and energy.  Furthermore, there is growing collaboration among SWFs, whether investing in an IPO, PIPE, or even venture capital deal.  Private back room deals with favorable investment terms are enhancing returns, rather than purchasing shares in the public markets.  In general, institutional investors are relying less on public markets for returns.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Bloomberg reports, “U.S. infrastructure-spending plans are “too little, too late” and should be increased in preference to quantitative easing, said Zhou Yuan, head of asset allocation at China’s $300 billion sovereign wealth fund. Proposed spending of about $500 billion over six years on infrastructure should be doubled, Zhou said in an interview on Oct. 30.

China Investment Corp. may invest, and wouldn’t expect to own completed projects, he said. “Infrastructure of this kind will serve to provide more jobs” than further quantitative easing, Zhou said in New York, while attending a conference hosted by the Chinese Finance Association. Low interest rates in the U.S. are his “top concern,” he said.

Congress has yet to approve the proposed $500 billion of spending on highways and transit. Transportation Secretary Ray LaHood said Oct. 12 he hoped Congress would make the plan a priority next year. Beijing-based CIC was created in September 2007, funded by a $200 billion allocation backed by China’s foreign reserves. Zhou said the fund has depleted its cash to the point where it’s seeking more government money. About 8.6 percent of the portfolio was in cash as of June 9, according to Executive Vice President Jesse Wang. Cash and equivalents were 32 percent of holdings at the end of 2009, according to its annual report.

“We are expecting continued injections,” Zhou said. “The form, quantity and structure remain to be determined.””

Source: Bloomberg

Xinhua reports, “Bank of China (BOC), the country’s fourth-largest lender by assets, said Friday it would raise up to 60 billion yuan (8.97 billion U.S. dollars) in a dual rights issue in Shanghai and Hong Kong stock exchanges to replenish capital.

In a statement filed to the Shanghai and Hong Kong stock exchanges, BOC said it will sell one share for every 10 existing shares and start taking subscriptions from existing investors on Nov. 3.

The new shares are priced at 2.36 yuan per share for A-share investors on Shanghai Stock Exchange or 2.74 HK dollars for H-share investors in Hong Kong, it said.

According to the lender’s equity structure, BOC will raise about 42 billion yuan (6.28 billion U.S. dollars) from A-share shareholders and 18 billion yuan (2.69 billion U.S. dollars) from H-share investors.”

Read more: Xinhua

Goodman Group, a large Australian property that has received investment from the China Investment Corporation is leading a consortium to takeover ING Industrial Fund. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

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According to Reuters, “Sovereign wealth fund China Investment Corp (CIC) has pulled out of a debt-for-equity swap with Bumi Resources because of disagreement over terms, said a source with direct knowledge of the deal on Friday.

The decision by CIC is a setback for Bumi which had hoped to swap some of the $1.9 billion in debt that it borrowed from CIC last year into equity in order to reduce its gearing.

Bumi had originally planned for CIC to buy its entire $495 million share placement, sources told Reuters in June, but the coal miner has since scaled back the size of the deal to raise $362 million, priced at 2,366 rupiah per share. For most of the period since June, when talks between the two parties started, however, Bumi’s share price has traded below 2,000 rupiah.

“CIC decided to pull out from the deal because of the difference in the share price,” said the source.

“They are a sovereign wealth fund and it’s hard for them to accept Bumi’s premium.”

Read more: Reuters

According to the press release, “OP Financial Investments Limited (“OP Financial” or “the Group”), is pleased to announce that on 25 August 2010 a limited partnership was formed with China Investment Corporation (“CIC”), both through wholly owned subsidiaries, with the principal purpose to invest directly or indirectly in the production, processing, transportation and trade of agricultural crops on a trial basis in Kazakhstan. Total paid up capital of US$ 16.5 million was received on 21September, 2010 to fund preliminary trials. CIC and OP Financial have injected US$15 million and US$1.5 million respectively to the project, led by Zhang Weidong, Deputy CEO and head of OP Financial’s private equity team.

As the General Partner, OP Financial shall manage and introduce technology partners to the project. This is OP Financial’s second arrangement with CIC to date.

Mr. Zhang Gaobo, CEO of OP Financial, said, “We are pleased to continue our partnership with CIC with this new project in Kazakhstan. The agriculture industry is becoming increasingly important, especially in light of growing global demand for food. Kazakhstan is a leader in energy such as oil and gas, but with technology and implementation of global best practices, we believe it can be a leading player in the agri–sector as well.”

Source: Press Release

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According to Reuters, “China should sell dollars and diversify its foreign exchange reserves if the United States sticks to loose monetary policy, the head of the Chinese sovereign wealth fund said in an article published this week.  Lou Jiwei, chairman of the $300 billion China Investment Corp, also offered policy advice to the United States, saying the best course of action would be for it to tighten monetary conditions while ramping up stimulus spending.  He said the United States did not have much to gain from monetary easing, because little cash was entering the real economy and a large amount was leaving the country via dollar-funded carry trades.  Under such conditions, the dollar would steadily depreciate, and Asian economies and oil exporters might lose faith in it as a global reserve currency, he said.

“For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets,” Lou said.

The article was published this week as part of a book for the Second Summer Palace Dialogue, a meeting of American and Chinese economists that took place in Beijing.

It appeared that Lou had written the article at least several months earlier, but this was the first time that it had been published.  There is evidence that China has, in fact, stepped up its pace of foreign exchange diversification this year, cutting back its vast holdings of U.S. Treasuries and buying record amounts of Japanese and South Korean debt.  But Lou said that it was not too late for the dollar. A move toward tighter monetary policy would reduce expectations of depreciation, restrain the dollar-funded carry trade and support global financial stability, he said.  For the U.S. economy, tighter monetary policy could also pay unexpected dividends, he said.

“If the dollar carry-trade lessens and capital from Asian countries and oil-exporting countries continues to flow to the United States, then liquidity in the United States might even increase,” he said.”

Read more: Reuters

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According to the Independent, “China’s biggest sovereign wealth fund is in talks to buy a stake in one of London’s tallest skyscrapers being developed by Britain’s largest property company.

The China Investment Corporation (CIC) has approached Land Securities about taking an equity stake of up to 25 per cent in the proposed “Walkie-Talkie”, the 500 ft tower at 20 Fenchurch Street designed by Rafael Vinoly. Land Securities won planning consent for the Square Mile site two years ago after a public inquiry sparked when English Heritage and others objected to its impact on the sight lines to St Paul’s Cathedral. The 36-storey building (down nine floors from the original plan) will cost an estimated £300m to build and is scheduled for completion in 2014.

It is nicknamed the Walkie-Talkie because of its top-heavy shape, designed to maximise high-rent floor space on the upper stories.

The FTSE-100 company entered into exclusive discussions with Canary Wharf Group to jointly develop the site in June. As part of the proposed deal, Canary Wharf would build the tower. These talks are still ongoing but it is thought that CIC, a wholly owned state company based in Beijing, has entered the negotiations.”

Read more: Independent

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According to the Wall Street Journal, “Central Huijin Investment Ltd., the domestic-investment arm of China’s sovereign-wealth fund, will sell its first batch of bonds as soon as this month and aims to issue up to 187.5 billion yuan ($27.7 billion) of bonds by 2011 to help maintain its stakes in large state-controlled banks, a person familiar with the situation said Tuesday. The debt issue comes as Central Huijin faces increasing financing pressure in its efforts to maintain its controlling stakes in major domestic banks, which have been gearing up for share offerings and convertible-bond sales in recent months to boost their capital after a sharp increase in lending last year—the key platform of China’s stimulus measures—eroded their capital.”

Read more: Wall Street Journal

According to the CIC report, “From its inception in September, 2007 through the end of 2008, CIC deployed about USD 21 billion into the market. The gradual deployment of capital was appropriate for a new company particularly under the turbulent market conditions. However, as CIC built its capability and the global economic and investment environment started to show signs of recovery, it significantly stepped up its investment activities, making new investments of about USD 58 billion in 2009.

Investment Performance

1 Return on Capital is based on the accounting income of CIC’s global portfolio, and the cash income and cash dividend declared from its domestic portfolio companies. The return rate is calculated based on CIC’s registered capital of USD 200 billion. Under the equity accounting method, accounting income is generally larger than the cash dividend received from the domestic portfolio companies. Since CIC’s domestic investments are for long-term purposes and their disposals are under restriction, CIC believes cash returns to be more appropriate performance metrics for Central Huijin’s domestic financial institution investments.

2 Global Portfolio Return is based on the annual change in the fair market value of CIC’s global investments.”

China’s sovereign wealth fund is set to post its best yearly gain in 2009 after stepping up investments in commodities to ride a rebound in global markets.

China Investment Corp. is likely to report a return on its global portfolio “well over 10 percent” in its upcoming annual statement, said Rachel Ziemba, London-based senior analyst at Roubini Global Economics. The $300 billion fund had a 2.1 percent loss on its global assets in 2008, after chalking up a 0.2 percent return in its starting year of 2007 when the value of a $3 billion investment in Blackstone Group LP plunged.

Chairman Lou Jiwei pumped nearly $10 billion into commodity-related companies such as Canada’s Teck Resources Ltd. in the second half to benefit from the global economic recovery. That compared with $4.8 billion in new investments across all industries for the entire 2008.

“2009 results should be good because commodities staged a strong rally,” said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. “CIC was very timid, which actually helped it to avoid the financial tsunami” in 2008.

According to the press release, “The AES Corporation (NYSE: AES) and China Investment Corporation (CIC) announced today that their non-binding Letter of Intent for a 35 percent investment in AES Wind Generation, which was signed on November 6, 2009, expired as of June 30, 2010. AES and CIC may resume discussions as additional clarity develops surrounding renewable energy legislation in the U.S.”

Read more: Press Release