China’s NSSF lines up PE fund portfolio

Oct 25, 2016

The $276 billion state retirement fund will hire China Everbright Limited for the new mandate as part of its push into direct equity and private equity investments.

China’s National Social Security Fund is setting up a separately managed fund-of-funds (FoF) portfolio with investment firm China Everbright Limited (CEL), which will invest into the latter's products.

This is part of the $276 state retirement fund’s strategy to increase allocation to direct stakes and private-equity funds to improve returns amid market volatility. It has not indicated the size of the mandate.

The new partnership is almost complete, said James Pan, a member of CEL’s management decision committee, at his firm's investment conference in Qingdao last week. NSSF has done due diligence on CEL’s products and is choosing 10 to 13 of them for the portfolio.

Hong Kong-based CEL, part of state-owned mainland financial group China Everbright, will then decide the allocation of the chosen funds, based on investment cycles and conditions.

As of end June, CEL managed 33 funds, most of which invest in private markets, with total AUM of HK$67.8 billion ($8.7 billion).

NSSF generally prefers investment strategies that are simple but have strict requirements around infrastructure such as trading systems, internal compliance and risk management, and which offer transparency, said Yang Ping, CEL’s chief investment officer, at the event.

Hugo Shong, founding general partner of China technology-focused venture capital firm IDG Capital, agreed, saying NSSF has a very professional investment team.

IDG was among the second batch of seven PE managers in China to be approved to manage NSSF money in 2009. The first batch, handed out in 2008, included two firms – Hony Capital and CDH –each of which got Rmb2 billion ($295 million) from NSSF.

NSSF invested Rmb1.2 billion in 2010 into a Rmb3.6 billion fund that IDG raised and is ready to invest in its another fund, Shong said. Managing the state institution’s money is like “walking on the thin ice” because of the responsibility it entails, he noted. “We were clear that we should only do what we were familiar with.”

Among the investments made was Beijing Baofeng Technology, an online video company that listed in Shenzhen in 2015. Baofeng’s share price rose by the daily maximum of 10% on 39 of the trading days between April 3 and its peak at Rmb301 May 20. It closed at Rmb61.39 yesterday, at a price-to-earnings ratio of 91.6x.

Another IDG investment that NSSF bought into was Beijing W Town, a resort in north Beijing. The project started trial operations last year, making Rmb100 million in profit for the year, said Shong. It officially opened this year, he added, with profits expected to rise to Rmb300 million.

NSSF started to allocate to mainland direct equity investments in 2015. It took a 5% stake in Ant Financial, the financial services arm of e-commerce giant Alibaba, in June last year. The value of the investment rose 35% last year during the second round of fundraising, said Wang Zhongmin, vice chairman of the National Council for Social Security Fund (NCSSF) in February.

NCSSF achieved 15.14% return in 2015, largely driven by its exposure to direct equity investments and PE funds, to which it plans to boost its allocation, said Wang. The move reflects a similar trend among Asian retirement funds such as Malaysia’s Employees Provident Fund and Taiwan’s Bureau of Labor Funds.