UPDATE 1-China sovereign fund to buy CITIC Cap stake -sources

Mon Jul 20, 2009 12:16am EDT

* CIC to invest HK$2 billion for 40 percent of CITIC Capital

* First investment by CIC in Chinese asset manager

* Alliance helps CIC tap domestic deal opportunities

* Capital base of CITIC Capital rises to HK$5 billion (Adds sources' quotes, details and background)

By George Chen

HONG KONG/SHANGHAI, July 20 (Reuters) - China Investment Corp (CIC), the country's $200 billion sovereign wealth fund, has agreed to invest HK$2 billion ($258.1 million) for a 40 percent stake in private equity fund manager CITIC Capital, sources said on Monday.

CITIC Capital, backed by the powerful CITIC Group, which is directly led by the cabinet, will issue new shares only to CIC, and the deal could help the fund manager boost its capital base to HK$5 billion from the current HK$3 billion, said the sources with direct knowledge of the matter.

The alliance with CITIC Capital is CIC's first investment in a Chinese asset manager. It will give the young sovereign fund, whose main focus is to invest abroad, a channel to tap domestic deal opportunities.

CIC's investment is only for the fund management firm and will have no impact on several funds worth about $2 billion in total now managed by CITIC Capital, said the sources.

Many institutional investors, also known as "limited partners" (LPs) of CITIC Capital's China-focused buyout and real estate funds, welcomed the deal, said the sources.

"LPs definitely welcome the deal, given CIC's government background, which can help CITIC Capital to do domestic deals easier in the future," said one source.

The sources, which declined to be identified before an official announcement is made, added the deal was expected to be announced this week or next.

Both CIC and CITIC Capital declined to comment.

Beijing's influential Caijing magazine first reported the alliance between CITIC Capital and CIC at the weekend. Reuters reported in February that CIC was in talks to buy up to half of CITIC Capital. [ID:nHKG22741]

NEW SHAREHOLDER

Steel-to-property conglomerate CITIC Pacific (0267.HK) and CITIC International Financial Holdings Ltd, whose parents are the same CITIC Group, each now hold 50 percent of CITIC Capital.

After CIC's investment, the shareholding of CITIC Pacific and CITIC International Financial, will drop to 30 percent each as they decided not to buy new shares of CITIC Capital this time, the sources said.

CIC will appoint new directors on CITIC Capital's board but CIC representatives will not interfere in CITIC Capital's decisions in regards to future deals, said the sources.

CITIC Pacific stunned markets in October when it warned of a potential $2 billion loss, which later rose to nearly HK$19 billion, from wrong-way bets on the Australian dollar.

CITIC Capital is well known for its expertise to restructure big Chinese state-owned enterprises including Harbin Pharmaceutical Group, one of China's biggest drug firms, and Fushun Excavator Co Ltd, the country's largest manufacturer of hydraulic crawler cranes.

Foreign funds such as Carlyle [CYL.UL] have complained for a long time about the difficulties in securing approvals to buy state-owned firms in the world's fastest growing major economy.

CITIC Capital was in talks with China's national pension fund to launch a yuan-denominated private equity fund, Reuters reported in August. [ID:nSHA5963]

For related Asian private equity news, Reuters 3000 Xtra users can double click on: [LEN-RTRS-ASIA-PVE] ($1=7.749 Hong Kong Dollar) (Additional reporting by Samuel Shen and Jacqueline Wong)