ChinaÆs SSF to boost private equity holdings

ChinaÆs largest pension reserve fund is committing 10% of its AUM, or around $7.3 billion, to domestic private equity investments.
ChinaÆs National Council for Social Security Fund (SSF) is looking to expand its private equity exposure and further its risk management techniques in relation to the asset class. The SSF operates and manages the assets of the National Social Security Fund (NSSF).

The move was discussed in a recent meeting attended by SSF chairman Dai Xianglong. Also in attendance were representatives of private equity funds that already have allocations from the SSF, as well as officials from the National Development and Reform Commission (the de facto economic planning unit of China), the Ministry of Finance, Ministry of Commerce, and the Ministry of Human Resources and Social Security, which are looking for funds to prop ChinaÆs cooling economy.

At the meeting, the SSF committed 10% of its total assets under management, or Rmb50 billion ($7.3 billion), to domestic private equity investments, as part of the State CouncilÆs initiative to stimulate ChinaÆs financial markets and expand domestic consumption.

The SSF currently has about Rmb5 billion ($735 million) invested in four domestic private equity projects. Following its recent culling of domestic fixed income investments, a rough calculation suggests the SSF has around Rmb45 billion ($6.6 billion) worth of fresh funds to support domestic private equity projects.

Previous investments made by the SSF include: the China-Belgium Direct Equity Investment Fund, a Rmb1 billion ($147 million) joint venture between the Belgium and Chinese governments conceived in 2004 (SSF funded Rmb155 million or $23 million); the Bohai Investment Fund, a private equity project initiated by Dai when he was still a mayor of Tianjin; Hony Capital, a project controlled by the PC giant Lenovo Group which swallowed IBM in 2004; and CDH Investments, which supposedly was seeded with money from Goldman and 3i.

The fund has most recently transferred Rmb2 billion ($294 million) of new funds to Hony and CDH Investments.

The meeting concluded with concerns about the role of private equity funds. It is preferred that these funds not only act as a conduit for capital transfer, but the SSF wants experienced managers with actual business know-how who can add value to target companies that they will invest in. The SSFÆs officials want to stay away from funds that are short-term in nature, particularly those that operate slash-and-burn style.

The SSF has identified its target funds as those with stable cash flows, established reputations and a solid track record û qualities that leave just a handful of managers making the grade in a nascent private equity market.

So far this year, the SSF is satisfied with the performances of the four private equity funds it has exposure to, according to Dai.
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