China Investment Corporation (CIC), the $941 billion sovereign wealth fund (SWF) in China, is likely to initiate more bilateral and multilateral funds in its overseas investments while seeking to meet its target in alternative exposure.

The SWF said that the new bilateral and multilateral funds are “integral to CIC’s effort to develop new ways of making overseas investments” and are “important levers to increase CIC’s allocation of long-term assets”.

Throughout the deal sourcing, evaluation, execution and post-investment value creation process, it has made extensive efforts to explore synergies between bilateral funds and direct investments from a Chinese perspective, according to its 2018 annual report released last Friday (September 20).

These funds are CIC-led private equity funds, in which CIC can be a general partner or limited partner. CIC partners with financial institutions to bring in other investors and to launch the funds, a senior executive at CIC told AsianInvestor on condition of anonymity.

In essence, the funds act like platforms to draw interested investors into investments that help to promote industrial developments in China and the partnered country, he said.

These bilateral and multilateral funds do not yet account for a heavy proportion of CIC’s global portfolio. But if more investors are interested in the model, it will gradually grow in size, although how quickly will depend on many factors including global trade, he added.

One recent example is the cross-border fund with Korean banking giant Hana Financial, which would be the first of its kind to be launched by a Korean financial services firm and a foreign SWF.

It was reported in July that CIC intended to set up a W1 trillion ($850 million) joint fund with Hana Financial, which will allow investments in companies seeking to penetrate each other’s markets.

Senior CIC officials met South Korea-based private equity firms – including MBK Partners, IMM Private Equity and BlueRun Ventures – during a recent visit to Seoul, to attract them as co-managers of the new joint fund. They will draw investments from Korean institutional investors.

CIC and HSBC were also in talks last year to raise £1 billion ($1.28 billion) to help the SWF to invest in British companies with Chinese links. The fund would be managed by London-based private equity firm Charterhouse Capital.

ALT PUSH

CIC was established in 2007 to diversify China’s foreign exchange holdings. Its three subsidiaries are CIC International, CIC Capital and Central Huijin. Overseas investments are undertaken by CIC International and CIC Capital, while Central Huijin undertakes equity investments in key domestic state-owned financial institutions.

As of end 2018, CIC had $940.6 billion in gross assets and $858.8 billion in net assets. Central Huijin managed state-owned financial capital worth Rmb4.3 trillion ($606.4 billion), or about 40% of central state-owned financial capital.

Its overseas portfolio posted a net annual return of -2.35% last year on the back of global economic slowdown and trade frictions, its annual report shows. But the SWF said that this level has outperformed its internally set annual assessment benchmark.

Despite the global market uncertainty, the weight of alternative investments, including direct investments, in the overseas investment portfolio reached 44.1%, up 4.8 percentage points from the previous year. In contrast, public equity's exposure was down 5.3 percentage points to 38.3%.

Source: CIC

The alternative push will go forward in the coming years.

“Progressively, we increased our investment in alternative assets, consolidated our private equity investments, increased investment in assets with stable returns and stepped up co-investments in various ways,” it said.

“By the end of 2022, [CIC will] boost the proportion of non-public market investments, mainly in alternative assets and direct investments, to 50%,” it said.

To achieve this, CIC is likely to rely more on in-house capabilities, as 42.1% of CIC’s global assets were managed internally in 2018, higher than the 37.4% a year before.

Li Keping, the sovereign wealth fund's senior adviser and former chief investment officer, said in October 2017 that it would strengthen its in-house investment capabilities in light of the relatively limited availability of private market managers and amid a hugh push into alternatives.