No lack of funds

Scarcely guarded ambitions

Citic Securities is already the largest listed brokerage in China. It also owns the country’s largest asset management company. And now, it wants to run the biggest private equity fund.

Last week the company announced that it has completed the final round of its fundraising for its debut PE fund. Citic Mianyang Private Equity Fund closed after raising a total of Rmb9 billion ($1.3 billion). That means that it surpasses Tianjin-based Bohai Industrial Investment Fund as the largest yuan-denominated PE fund raised in China.

It is being managed by Citic Private Equity – a wholly owned unit of Citic Securities – and intends to invest in four major sectors: finance, consumer, raw materials and machinery manufacturing.

Investors have clearly been sold on the fund’s unique access to opportunities. “We’re known by local governments and portfolio companies as insiders,” Wu Yibing, the president of the company, told the Wall Street Journal. “We can say ‘we are your friend’.”

And unlike the top executives at many private equity firms in China, the fund’s investment committee “doesn’t need to speak English,” says Wu. In fact, its chairman Liu Lefei, formerly the chief investment officer of China Life Insurance, has never studied overseas.

Citic Securities is part of the government-owned Citic Group, established by former Chinese vice president Rong Yiren – aka the “red capitalist“ – with the blessing of Deng Xiaoping in the late 1970s (see WiC11). Today, Citic Group remains the country’s largest state-owned conglomerate, directly reporting to the State Council, China’s cabinet.

Citic Private Equity has already been active with the capital raised in the initial round of fundraising two years ago, closing 10 deals with a total transaction value of more than Rmb2 billion over the past year. Among its portfolio companies are Kuaijishan, the oldest Chinese liquor brand, and Wind Info, a data-service provider.

But Citic has also learned that its political clout doesn’t put it above the law completely. Its asset management arm ChinaAMC was recently blocked from launching new products by the China Securities Regulatory Commission (CSRC) after failing to comply with stake ownership rules.

ChinaAMC, which has around Rmb260 billion worth of assets under management, is the largest asset manager in China. But under the nation’s stake ownership rules, no entity can own more than 49% of a mutual fund house. The concern is that a holding company might ask the fund manager to buy stakes in other companies that it controls at high prices.

But Citic Securities tripped the ownership threshold two years ago when it took over ChinaAMC and merged it with its subsidiary Citic Funds, to become the sole owner of the new business.

Citic pledged last January to comply with the regulations within six months but, despite repeated warning, has been slow to divest its holdings. Clearly annoyed, CSRC suspended all approvals for ChinaAMC products and has threatened further punitive measures if Citic doesn’t comply with the rules by April 1.

Selling a chunk of ChinaAMC will certainly hurt Citic’s long term cash flow. ChinaAMC’s fund management income reached Rmb1.25 billion in the first half of 2009, says Shanghai Securities News.

Analysts reckon Citic will probably respond by selling a stake to a foreign investor. That’s because the rules do alllow Chinese companies to hold more than 49% of a mutual fund if the fund company is a joint venture with a foreign firm. They are allowed to hold up to 75% in joint venture fund managers if foreign investors hold the remaining 25%.

Still, industry observers say it could turn out to be a tough sale. Few foreign buyers have cash to burn at the moment. A 25% stake in ChinaAMC would be worth approximately $500m, according to Z-Ben Advisors, a Shanghai-based consulting group.

A case in point: last November, a chunk of China’s third largest asset management firm Bosera, held by China Merchant Securities, was also put out to international auction. Interest was underwhelming and the final divestment was completed in sales to four local investors.

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