HONG KONG China Investment Corp CIC.UL is pumping billions of dollars into private equity firms in a move meant to boost returns at the sovereign wealth fund, with an eye on taking a more active role on dealmaking.
The shift marks a strategic milestone in CIC's evolution from a slow paced, low return sovereign investor towards an institution following the so-called Harvard endowment model.
CIC, which manages $410 billion, is following the lead of Singapore state investors GIC GIC.UL and Temasek TEM.UL, which have built a history of investing in private equity funds as a so-called limited partner.
"GIC and Temasek have been at it longer and evolved to their direct strategies more organically," said Joshua Kahn, a director at Hamilton Lane, which oversees more than $150 billion in assets under management and supervision by private equity firms.
"I think CIC is trying to leapfrog that organic process a bit, and the question remains, do they have the internal capabilities and experience to succeed in that?"
Should CIC step more into direct investments, it could both co-invest with established funds such as KKR (KKR.N) and Carlyle Group (CG.O) and compete against them.
The move comes amid a broader shift in China's overseas investment model by its government funds.
Beijing has agreed to buy investment stakes currently held by General Motors' pension plan, in a deal that will make it a sizeable investor in many of the United States' and Europe's largest private equity funds, the Financial Times reported on Thursday.
The State Administration of Foreign Exchange, which manages China's more than $3 trillion in foreign exchange reserves, is buying up GM's pension positions in several major private equity funds, including Carlyle Group and CVC Capital Partners.
CIC is setting up a multi-billion dollar fund with BlackRock Inc (BLK.N) to help Chinese companies acquire targets overseas. The fund will be helmed by Liu Erfei, chairman of Bank of America Merrill Lynch's (BAC.N) China operations.
It has also invested in a fund for West Summit Capital, which specializes in cross-border investments, and has acquired majority stakes in a number of U.S. tech firms.
CIC provided all of the original $300 million for West Summit's first fund, and is expected to provide another $300 million for a second fund, targeted at up to $600 million, according to a source familiar with the matter.
Previously, CIC took a much more passive private equity approach. It's first such deal was purchasing a stake in the Blackstone Group before the firm went public. That holding was a standard bucket of shares, with no board or deal influence.
The new approach allows more influence, and chances for greater gain. In private equity, a $100 million commitment to a firm can turn into a $300 million gain if the fund does well. CIC said in 2008 that its aim was single digit returns.
Private equity funds typically promise returns of more than 20 percent over a three to five year duration.
The endowment model, named after the approach pioneered by the wealthy endowment funds of U.S. universities such as Harvard and Yale, encourages asset managers like CIC or Temasek to take a more active investment role.
That includes making direct investments in companies, and even setting up their own pension funds or hedge funds and taking management stakes in them.
Industry insiders in Asia see the popularity of the more aggressive style rising rapidly, with CIC and Canadian funds such as Ontario Teachers and Canada Pension Plan becoming more assertive in the region.
As the model gains prominence in Asia, and funds like CIC get more experienced, that could ultimately put CIC in direct competition against some major private equity funds competing to buy stakes in companies.
Kahn, of Hamilton Lane, said funds such as CIC were starting to venture out more on their own to capture more of the top deals, and take a greater profit from them.
Groups such as CIC are also exploring joining forces with other major Asian institutional investors to set up separate funds aimed at more dealmaking, industry insiders say.
"It's the big boys club," said Juan Delgado-Moreira, Asia head at Hamilton Lane. "You get two or three of these guys and you've got $1.5 billion."
CIC and West Summit did not respond to requests for comment. The sources could not be named as they were not authorized to talk to the media.
(This story corrects figure in paragraph 3 to more than $150 billion, not $105 billion)
(Editing by Michael Flaherty and Alex Richardson)