The mooted joint-venture between China sovereign wealth fund CIC and global asset manager BlackRock will be a private equity-style fund less than $10 billion in size, sources are estimating.
The fledgling partnership – news of which was broken by the Financial Times last Thursday – is certainly one that promises to be mutually beneficial. The understanding is that CIC will be able to leverage BlackRock’s global scale and research, while BlackRock can hope to make swift progress in its China investment strategy, which hitherto has been very limited.
The timing is significant, as evidently both parties are seeking to build alternative investment platforms. CIC has boosted its exposure to alternatives from 6% in 2009 to 21% in 2010 (the last available figure), while last month BlackRock hired Joseph Pacini from JP Morgan Private Bank (Asia) in a new role as head of its alternative investors strategy group for Asia-Pacific ex-Japan.
Moreover, this deal can also been seen in the context of China’s own rapidly growing private equity market. The thinking is that this will be a fund to invest in private equity opportunities both in China and around the world, including Chinese technology firms going overseas.
That is the view of Winnie Deng, who covers cross-border activities for Shanghai-based consultancy Z-Ben Advisors, with reference to QDII, QFII and RMB internationalisation. “I think this is a PE fund,” she says, “given the specialisation of BlackRock in private equity.”
Globally BlackRock Alternative Investors managed $105 billion in alternative assets as at December 31, including single strategy hedge funds, private equity, real estate, fund of hedge funds, PE fund of funds and special situations opportunities.
It boasts around 350 employees globally, while in Asia-Pacific its main hubs are in Hong Kong, Japan and Australia. Sources note it is not surprising it is now seeking to move into China.
But it is also an education transfer that is understood to underpin this collaboration, with CIC eager to capitalise on BlackRock’s global experience in PE deal-sourcing and execution, while BlackRock also gets hands-on insight into China’s PE scene.
Deng of Z-Ben believes the tie-up is a perfect match. “On the one hand given CIC’s governmental ties BlackRock will likely find fewer hurdles when it comes to potential deals, and on the other Chinese firms in general don’t have a great deal of experience in dealing with private equity, since it is something new to them.”
An Asia head at an auditing firm, who preferred to remain anonymous, adds: “The edge that this deal clearly gives BlackRock is the depth of the relationship with CIC, and it is something that is going to be long-lasting.
“I do not know the fee arrangements because this has been successfully kept under wraps, but I am sure BlackRock will be seeing this as a massive opportunity.”
Asked whether this tie-up potentially leaves other asset managers out in the cold with CIC in terms of external mandates, opinion is mixed, although there is an acceptance that SWFs in general are set on learning from foreign managers and thereafter increasing in-house expertise.
“I think other fund managers will continue to pick up business from CIC if they are best in class in a particular strategy,” argues the auditor.
But Deng believes it gives BlackRock a clear strategic advantage. “A partnership with CIC means that all the due diligence and stuff like that has already been done by the sovereign wealth fund. We know it would be very careful in picking which partner to collaborate with. So this is definitely an advantage in terms of other potential deals, especially in China.”
There are numerous examples of sovereign wealth funds and other state entities signing partnership deals with foreign asset managers and foreign banks.
One would be the tie-up between the Chongqing municipal government and Infinity Group last year under the Qualified Foreign Limited Partner programme. They established a $300 million fund to invest in manufacturing, bio-tech and clean tech, amongst other things. It came after Infinity first invested in Chongqing in 2004.
Further, The Teacher Retirement System of Texas signed up with four of the world’s biggest assets managers – namely BlackRock, JP Morgan AM, Morgan Stanley and Neuberger Berman – in 2008. Last year it also added Barclays to its investment programme.
Interestingly, one result of this Texas tie-up was at least 20 proprietary research projects over three years in a range of investment areas. This points to another potential factor behind the tie-up between CIC and BlackRock – the latter’s strong research capabilities.
As Peter Ryan-Kane of Towers Watson points out, the motivation behind such JV deals is varied. He led a transaction for Credit Suisse Asset Management when it and Morgan Stanley IM tied up with Korea’s National Pension Service in 2007.
“Motivations for these things on both sides are not quite as simple as most people might assume, based on my experience,” he says. “In certain cases it may not be the best manager who makes the best partner, there are multiple dimensions to it."
He also points to what he calls a market ability gap between the buy-side and the investment community. “That gap is large, particularly in Asia, where many of the sovereign funds, pension funds and central banks don’t have a competitive employee framework or the skill bases in their home countries to compete against global players who can hire from anywhere in the world.”
The consensus from sources AsianInvestor spoke to was that the joint-venture fund between CIC and BlackRock would be $1 billion to $3 billion in size and no bigger than $10 billion, with CIC expected to have majority control of up to 70% in the venture. It is expected to be jointly seeded.
Z-Ben notes that news of this deal came shortly after CIC received an additional $50 billion capital injection from China’s central bank, the PBoC.
“If the new fund is successful, many other large foreign asset managers with weak or no China exposure are likely to follow suit, utilising the SWF’s power to control their own destiny in China,” the firm says.
Deng notes the strong possibility that China’s NCSSF might look to follow CIC's example, given that it has a strong focus on alternative assets.
Asked if he felt this type of tie-up would become increasingly common, Cerulli Associates consultant Chris Wright says: “From the fund management side, this idea of a partnership with a sovereign fund is something we may well see more of. Singapore’s GIC, for example, has long approached private equity either through partnership with an existing player or by directly seeding it with funds, rather than giving that fund a chunk of money to go and manage.”
He notes that CIC restructured internally last April and now has four separate investment divisions, “three of which have something of an alternative bent to them”.
It has been reported that the new JV fund will be run by Erh Fei Liu, who recently quit as chairman of Bank of America-Merrill Lynch’s China operations, where he had worked for the past 12 years.
In an internal memo seen by AsianInvestor, BoA-Merrill's Asia-Pacific president Matthew Koder said that Charles Alexander, its head of Asia-Pacific corporate banking, had been appointed interim country executive for China.
“As a member of the Asia-Pacific executive committee, [Alexander] is well positioned to lead us through this transition period until a new country executive for China is appointed,” he stated.
A spokeswoman for BlackRock in Asia declined to comment.