Radical shift

China Investment Corp. looking at big move to PE, real estate

The $300 billion China Investment Corp., Beijing, might be on the cusp of “a major change to its investment practices” to focus on private equity, real estate and other alternatives, according to a research note to clients issued Monday from consultant Z-Ben Advisors.

If the CIC wins government approval for such changes, the shift could mean “terrific news for managers within those three categories,” said Michael McCormack, executive director at Z-Ben in Shanghai. However, the door to the CIC might be closed for a raft of other managers, particularly traditional active managers in developed market bond and equity strategies.

“A new focus on internal management will form part of a plan to make private equity and (alternatives) the focus of the portfolio,” according to the note to clients.

According to the CIC's latest available annual report — for the year ended Dec. 31, 2009 — about a third of its total assets are managed in an overseas investment portfolio with the remainder used to capitalize some of China's main financial institutions. Within the global portfolio, only about 7% of total assets was invested in alternatives. At the same time, 36% of the overseas portfolio was invested in equities and 26% in fixed income, with the remainder mostly invested in cash and cash-equivalent securities. The portfolio returned 11.7% in 2009.

“In a key sense, CIC is asking permission to restructure a proven winner,” according to the Z-Ben note, which did not include an estimate of the potential increase to alternatives. However, in a telephone interview, Mr. McCormack said alternatives could make up as much as 50% of the global portfolio by 2021 if the CIC does gain government approval to alter its investment strategy.

The CIC has been building its internal capability, and Mr. McCormack believes the new approach would mean a higher percentage of the fund would be managed in-house. However, certain specialists — particularly in alternatives, emerging markets and other regional strategies — might still benefit.

In order to maximize returns as a cash-rich investor with a longer-term horizon than most institutional investor, the CIC could turn its attention to much larger and illiquid stakes in companies. “We believe its executives are arguing for a much greater emphasis to be placed on developing capabilities in asset classes better suited to the fund's size and return horizon,” according to the note.

In a separate statement made at a panel discussion sponsored by Duke University late last year and referenced in the note, Gao Xiqing — vice chairman and chief investment officer of the CIC — said the fund has “changed tremendously” from one that invested mostly in public securities in a relatively conservative way to one with about 500 in-house investment professionals well trained to analyze many different asset classes including direct private equity investments.

“We need to think in a different way,” Mr. Gao said at the time.