Banking & Finance

Hu’s big fund

Top Chinese banker enters private equity fray

Hu’s big fund

Hu dares wins: Fred launches fund

Another week, another new private equity fund launch. The China Daily is reporting that Wall Street veteran Fred Hu (pictured) will soon be launching his own $10 billion China-focused fund called Chunhua. A number of institutional investors have already expressed interest. Ping An Group, the country’s second largest insurer, is said to be investing $5 billion.

Hu is not the first investment banker to switch to a private equity career. Other high profile movers included Fang Fenglei, also once a top investment banker, who set up a $2 billion fund with Singapore’s sovereign investor Temasek in 2007 (see WiC25).

These former bankers are eyeing China deals at a time when investors – from high net-worth individuals to big state-owned enterprises – are pouring money into the industry (see WiC61).

State owned enterprises like China Aerospace Science and Technology, the country’s aerospace and defence giant, is planning to launch a Rmb20 billion ($2.92 billion) private equity fund targeting the aerospace industry. Similarly, Founders Group, the country’s second-largest personal computer maker and also a state-owned firm, is also establishing a private equity venture focused on technology and telecoms.

Many local private equity firms that are fundraising are directly targeting state-owned enterprises which “all have cash to spare,” says New Century Weekly.

It’s not just the big state-owned firms that are interested in private equity. Local governments are also jumping on the bandwagon. Shanghai, for instance, is currently creating a fund targeted at the local shipping industry. Beijing, too, has set up funds for sectors including environmental and agricultural investments. Tianjin plans to develop a maritime industry fund, as well as an aviation fund, with China Construction Bank’s subsidiary CCB International.

The financial arms of some of the country’s major cities also want to partner up with large private equity firms to leverage their management skills in restructuring local state-owned enterprises.

Take Chongqing. In April, one of China’s largest asset management firms, Huarong Asset Management, and Chongqing Yufu Asset Management, a wholly-owned subsidiary of the Chongqing Municipal Government, set up a Rmb10 billion private equity fund together to invest in major companies and other government-backed enterprises in the city. The plan is that Huarong will apply its restructuring skills to “facilitate the reforms of local SOEs,” says Zero2IPO, a Beijing-based research firm.

These so-called government-guided funds are increasingly popular. Local governments like the idea of the potential payoffs. But as large investors, they also get a major say in how the fund is run, including the industries or companies in which it invests.

But analysts warn that private equity bosses are also taking risks in aligning themselves too closely to city governments, especially in terms of political interference in investment targets. In one high-profile case in 2008, a top government official in Shanghai was sentenced to 18 years in prison, ostensibly for funnelling large amounts of city pension funds into investments controlled by friends and family.

And remember Guangdong International Trust and Investment Corp (GITIC)?

In 1999, GITIC – owned directly by the Guangdong provincial government – filed for bankruptcy after capsizing under $4.3 billion in debt. The company was originally structured as something similar to Guangdong province’s private equity fund. It announced that it would be investing widely, in local infrastructure projects and yet-to-list companies.

But, over time, GITIC started taking on a massive amount of debt. Its investments performed poorly too. Worse, a large amount of the fund’s cash ended up being embezzled. It was all too much for the People’s Bank of China, the country’s central bank, which decided to shut GITIC down, creating billions of dollars in losses.

Did anyone say ‘deja vu’?

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