NSSF to invest billions in China PE

Jun 11, 2012

In a bid to boost returns, China's national pensions body is ramping up domestic PE investment, with nearly $5 billion to be allocated this year.

China’s national pension fund aims to allocate Rmb30 billion ($4.7 billion) to domestic private equity funds this year, with the sum to rise to Rmb50 billion by 2015 as it seeks to boost returns.

The planned allocation, announced by National Social Security Fund chairman Dai Xianglong, is a leap from the Rmb19.5 billion invested in PE funds in 2011. It also follows a recent disclosure that the $134 billion sovereign fund had derived nearly 70% of its total yield last year from private equity and direct investments.

Dai, speaking at a private equity forum in Tianjin over the weekend, said three PE fund contracts are to be signed, another two are in the due diligence process, and three or four are under consideration. If they pass the criteria, the commitments would add up to Rmb30 billion, added Dai.

Given the size of the average allocation – about $500 million per fund – it is likely that the capital will go to China’s largest and most well-established private equity players.

Large domestic PE firms that are in the process of raising new funds include Citic Capital, FountainVest Partners and China Development Bank Capital Corp.

NSSF’s Rmb19.5 billion allocation last year went to 13 PE and venture capital funds. Of that sum, Rmb7 billion is understood to have been invested into five vehicles managed by Citic Capital, CDH Investment, GP Capital Industrial PE Fund, Legend Capital, and China Broadband Capital.

The NSSF has been signalling its intention to ramp up its PE allocations for the past few months, given a lacklustre 5.58% return in 2011.

In a recent editorial written for mainland media, Hu Yifan, economist for Haitong International Securities Group, notes that the sovereign has been highly reliant on achieving returns from its equity investments.

The average annual return rate for the NSSF was 9.17% between 2001 and 2010. Although it had “substantial returns” between 2005 and 2007 – when the stock market was on a bull run – it sank in 2008 and 2010, Hu notes, making the case for assets to be invested for “prudent returns”.