China Investment Corporation (CIC) is increasingly turning to offshore co-investing as a way to access more new private assets, and is believed to be focusing these efforts on non-US countries to avoid increasingly entrenched tensions between Washington and Beijing.
The $1.045 trillion sovereign wealth fund has already marked some successes in this strategy; in early October it partnered with Italian lender UniCredit and private equity firm Investindustrial to launch a China-Italy Industrial Cooperation Fund. It has an initial capital of €600 million ($708 million) and will invest in European companies that open new businesses in China.
The investment follows CIC’s formation of a fund with BNP Paribas and Paris-based private equity firm Eurazeo in June, with an initial amount of €400 million ($472 million). That vehicle is targeting companies in advanced industrials, business services, consumer goods and services, healthcare, and digital technology sectors.
Daniel Brett, head of research of US-based research house Global SWF, believes that CIC is to seek out more such alliances in the short and medium term, noting it may have accelerated its co-investment plans due to the uncertainties posed by the Covid-19 pandemic and the ongoing US-China economic decoupling.
“[By conducting such co-investments] CIC ensures to find good opportunities with reliable partners on the ground and to circumnavigate the political resistance it may encounter in the recipient countries,” he told AsianInvestor in an emailed reply to questions.
Ye Kangting, senior analyst from Cerulli Associates, agreed that CIC is likely to continue pursuing co-investments over the long term, adding that it will likely pay close attention to geographic risks when it selects both fund partners and investment targets.
She noted that the fund has particular industry preferences: “CIC is on the way to invest more assets to higher growth industries including tech (AI, 5G), e-commerce and healthcare.”
Brett added that “CIC will be looking at opportunities within the pandemic for long-term yield. This could involve acquiring assets at attractive prices or examining targets in post-pandemic consumer trends: online shopping and e-commerce, videoconferencing, cybersecurity and enhanced focus on innovation.”
A CIC spokeswoman declined to comment on emailed questions from AsianInvestor on its co-investment strategy.
TOUGHER TIMES AHEAD
CIC has been seeking to both directly and to increasingly do so offshore for over a year.
In 2019, CIC Capital approved 30 investments worth $5.8 billion across infrastructure, energy, TMT, consumer, healthcare, manufacturing and agriculture, among others. CIC capital is the unit for making direct investment for bilateral, multilateral and platform funds, sharing co-investment responsibilities with the another unit, CIC International.
In addition, in early 2020, CIC set up an asset allocation and investment policy committee to oversee the allocation of its entire overseas portfolio. And almost one-third of its 689 employees work for its global investment team, according to its 2019 annual report.
CIC has yet to release any performance figures for 2020, but its 17.4% net return in its overseas portfolio for the 2019 calendar year beat its annualised cumulative 10-year net return of 6.6%. The gain was mainly driven by a rally in global equity markets.
The sovereign fund’s rising focus on offshore co-investments may well reflect a desire to diversify in preparation for an increasingly difficult investment environment over the coming months, as the economic impact of Covid-19 combines with abundant capital market liquidity combine and ultra-low interest rates.
“CIC, like all other SWFs, will find it harder to perform well in a low return, complex and uncertain world,” Gary Smith, managing director from UK-based consultancy Sovereign Focus, told AsianInvestor.
By focusing on co-investments, CIC can improve its private investment allocation, especially into alternative assets. These already constituted 42% of its portfolio as of the end of 2019.
“Moving away from public market towards private market investment (alternatives) will be one of the driving forces of CIC’s co-investments in European countries, more bilateral agreements may be needed to help the continued push into alternative investment,” Smith said.
The 2020 Sovereign Investors report published by PwC highlighted that 66% surveyed investors indicated significantly better or better returns from co-investing and expects an increasing amount of private type deals to be completed.
Brett noted that these plans could also help CIC overcome a reduction in internal expertise, following the recent shedding some of its most senior and experienced managers. He added that the sovereign wealth fund may use the alliances to bump up its skills base and analyse how best to work with external managers and attract new talent.
One area it may need to do so is into technology investments, an area where the sovereign fund has been more conservative than many others.
CIC’s apparent desire to invest directly offshore does not appear to extend to the US.
Global SWF’s Brett also noted that CIC is also responding to the trade war, becoming cautious of its exposure to hostile US policy and seeking to operate in a more discrete and less direct way.
In addition, he added that CIC’s investment priorities may well align with those of Chinese president Xi Jinping, who is seeking to expand Chinese soft power as a way to advance the country's economic and political interests. That is likely to raise the suspicions of other countries.
Smith wrote in a report on July 22 that while CIC is a recognised SWF with an established institutional architecture, the regulators of other countries – and especially the US – may well worry that Beijing exerts direct pressure on its strategic objectives or the foreign assets it owns during periods of economic or financial stress.
Interestingly, CIC’s avoidance of the US is a relatively recent phenomenon.
In November 2017 the sovereign fund formed the China-US Industrial Corporation Fund with Goldman Sachs on the side-lines of a visit by president Donald Trump to Beijing, in an effort to make potential US investments.
The fund had targeted $5 billion in commitments with a broad mandate to invest in American companies in the manufacturing, industrial, consumer and healthcare industrie, according to CIC's announcement at the time.
However, the fund has been very quiet since its formation. To date its only reported investment has been $3 billion for a stake in Boyd Corp, a Pleasanton, California-based manufacturer of rubber seals and gaskets, in September 2018.
Goldman Sachs declined to comment on whether the fund made any deals so far this year, while CIC declined to comment on the joint-venture fund's latest investment/strategy.