China Investment Corp (CIC), China's US$200-billion sovereign wealth fund, has agreed to invest HK$2 billion for a 40-percent stake in private equity fund manager CITIC Capital, Reuters and Caijing magazine reported, citing unnamed sources.
CITIC Capital, backed by the powerful CITIC Group, which is directly led by the country's cabinet, will issue new shares only to CIC, and the deal could help the fund manager boost its capital base to HK$5 billion from the current HK$3 billion, said the sources with direct knowledge of the matter.
"It will give CIC a very influential role in the fund to decide what to buy and what not to buy in the future," Xie Lijin, a lawyer specialized in private equity funds at Beijing-based Deheng Law offices, told China Daily.
"Plus, by investing in a fund of funds, this may be another way in the post-Rio world for China to make big block investments overseas in resources companies."
Steel-to-property conglomerate CITIC Pacific and CITIC International Financial Holdings Ltd, which are CITIC Group arms, each now hold 50 percent of CITIC Capital.
After CIC's investment, the shareholding of CITIC Pacific and CITIC International Financial, will drop to 30 percent each as they have decided not to subscribe to the new shares of CITIC Capital, Reuters said.
CIC will appoint new directors on CITIC Capital's board, according to the sources.
"This means CIC, as the biggest of the three limited partners, could have more power in deciding what to buy compared to the many former deals it invested in before," Xie told China Daily.
The deal is in sharp contrast to CIC's recent US$1.5-billion investment in Canadian miner Teck Resources, in which CIC signed a highly restrictive agreement and was widely perceived as being only a financial investor in the firm.
CIC gets no representation on Teck's board despite buying an economic interest of 17 percent in the company. The shares it is buying are vote-restricted B shares.
On the other hand, the investment in CITIC Capital, a fund of funds, is being seen as a move by CIC to employ overseas talent in managing its huge portfolio.
"As a young sovereign fund, CIC still lacks professional investment management skills. CITIC Capital, as a mature overseas private equity fund, will certainly supplement CIC's shortage in human resources," Xie said.
"CIC needs to be more commercial and professional in overseas investment deals."
Many institutional investors, also known as "limited partners", of CITIC Capital's China-focused buyout and real estate funds, welcomed the deal, said the sources. CIC could help CITIC Capital do domestic deals more easily in future, they added.
The sources, who declined to be identified before an official announcement was made, said the deal was expected to be announced this week or the next.
Both CIC and CITIC Capital declined to comment.
(China Daily July 21, 2009)