The opening of the CGN Capital Partners Fund III to international investors marks the coming of age of Qianhai, the zone on the fringes of Shenzhen earmarked as a place for global investors to access renminbi-denominated funds.
The CGN fund made its first close in May, raising Rmb1.88 billion ($296 million) from domestic investors. On Friday, September 4, the general partners officially opened the fund to the first of two additional fund raisings, this time involving potential foreign investors. The fund’s managers ultimately hope to raise Rmb5 billion.
Anthony Muh, principal and CEO at HRL Morrison & Co. Capital Management, a general partner to the CGN fund, said foreign institutions were demanding access to infrastructure and the stability of brownfield projects. The CGN fund is designed to put China on the map for this asset class, providing higher returns that can be found in the developed world but with a comparable risk profile.
The structure of the Qianhai-domiciled fund is the first to take advantage of new rules for Qualified Foreign Limited Partnership (QFLP) scheme that does not discriminate against a fund with US dollar investments.
“This is QFII for alternatives,” said Conrad Yan, partner at Campbell Lutyens, referring to the qualified foreign institutional investor scheme for long-only fund managers. “It is another step towards the internationalisation of the renminbi.” Cambell Lutyens is a private equity and infrastructure advisory firm not directly associated with the CGN fund.
QFLP was originally designated for funds in Shanghai wishing to attract international capital. Foreign investors could put renminbi into these funds and be treated the same as local investors, with less red tape and easier access to more sectors. However, in 2012 the National Development and Reform Commission ruled against a proposal by Blackstone to invest US dollars into a QFLP fund, saying it no longer qualified for treatment as a purely domestic vehicle.
Qianhai has also had a QFLP programme. This zone has been touted by central government officials as a new financial centre, where renminbi can freely cross the border into Hong Kong. The theory was that Qianhai-registered companies could receive renminbi-denominated loans from Hong Kong banks, and locally registered private-equity funds could tap Hong Kong investors for renminbi capital.
Since then, however, Qianhai has languished, due to the uncertainty over QFLP. It has been more of a construction site than a financial centre. That may be changing, however.
Muh said the CGN fund was the first infrastructure fund to be allowed to mix US dollar investments freely with renminbi capital and still enjoy status equal to purely domestic funds. The ability to pool dollars and renminbi together can create scale, giving the fund an edge.
Under the new Qianhai QFLP rules, such commingled funds will still require approval from the Ministry of Commerce to target assets, but infrastructure is generally an open sector. Launching an infrastructure fund should be straightforward, Yan said.
Hony Capital, which said it would move its headquarters from Beijing to Qianhai when the zone first opened, is said by CGN fund backers to be readying the first private-equity fund to launch under similar auspices.
The CGN fund was launched by Jida Capital Partners and CGN Private Equity, a unit of CGN Group, a state-owned power generator in sectors other than coal. Jida is an affiliate of HRL Morrison & Co, a New Zealand-based infrastructure investment specialist.
Raymond Fung, CEO and CIO at CGN Private Equity in Shenzhen, and the founder of Jida Capital, said the fund would primarily target opportunities to buy wind power generation assets.
The parent, CGN Group, is one of China’s biggest state-owned developers of renewable energy and nuclear power. For instance, it operates the Daya Bay nuclear power plant in Guangdong Province, which provides Hong Kong with electricity.
Fung said the biggest opportunity in renewables for investors was wind. In 2014, China added 23,000 megawatts of generating capacity, or 45% of the world’s installed wind power, while the next biggest player, Germany, added 5,000MW.
The fund will target brownfield power generators. Given the sheer amount being built in China, there are plenty of ways for an asset manager to choose outperforming assets, which is often a matter of connectivity to transmission networks. (The massive increase in wind turbines in China has not been matched by distribution capacity.)
The fund will leverage CGN Group’s connections with small, private owners looking to exit the business. Wind power farms are also owned by state-owned enterprises, but these tend to retain their assets, according to May Li, a director at the fund.
Muh said the fund would target an internal rate of return of 12% but noted it had the potential to do better. The fund’s life is five years. The domestic institutions include China’s big-four state-owned commercial banks, its asset-management companies and large insurance companies.
International investors that have been invited to invest as limited partners include sovereign wealth funds, Japanese trust banks, Korean life insurance companies, investment banks and their fund-of-fund arms, and private equity investment platforms.
This is not the first infrastructure fund in China. Ping An Trust and Macquarie Capital also manage such products, and China Life Insurance is said to be planning one. However, this is the first one domiciled in Qianhai that can accept US dollars without being treated as foreign.