Despite its Billion-Dollar Loss in Blackstone Deal, China SWF CIC Sees the Bigger Picture

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

When China Investment Corp. (CIC) opted to make The Blackstone Group LP (BX) its first investment last May, leaders of China's $200 billion sovereign wealth fund clearly expected a better outcome.

CIC invested $3 billion for a 10% stake in Blackstone, which many analysts believe is the Cadillac of U.S. private-equity firms, despite only being the second-largest by size. At Monday's closing price of $15.95 a share, however, Blackstone's stock is down 48% from CIC's purchase price of $29.605 per share.

At that price, CIC's loss to date - on paper - is a staggering $1.44 billion.

But here's the real stunner: The fund's managers may not really care. The reason: China made the play for Blackstone as much for the dealmaking know-how its SWF leaders hope to gain as they did for an actual investment return, says Money Morning Investment Director Keith Fitz-Gerald.

"While the Chinese are probably just as unhappy as [other] investors are about the decline in Blackstone's share price, my guess is that they're probably not overly concerned. Contrary to what much of the world thinks, the Blackstone purchase was not so much about immediate returns as it was about intellectual capital," Fitz-Gerald said in an interview. "As long as the Chinese feel they're learning how to manage their assets better, they'll probably believe they've gotten a good value for their money."

CIC's Big-Picture Strategy

CIC, the sovereign wealth fund in China responsible for managing part of China's estimated $1.3 trillion in foreign exchange reserves, was formed last year. It invests in U.S. Treasury securities, private-equity and hedge-fund deals, and other lower-risk investments. It focuses on financial-service firms, and tends to avoid foreign airlines, telecommunications stocks and energy-sector plays.

With roughly one-third of its assets earmarked for investments in Asia, CIC has now turned its attention to Japan, BusinessWeek reported last week. In fact, the Beijing-based SWF has drafted an investment policy for Japan, and is likely to appoint a fund manager to monitor its Tokyo investments by the end of this month. Half the funds it has set aside for investments in Asia will be invested in Japan.

After meeting with CIC General Manager Gao Xiging, Japanese Financial Services Minister Yoshimi Watanabe said "I am sure he came to Japan because they are interested in investing in Japan, so I told him we will welcome it very much."

According to a Sunday media report, CIC is now interested in acquiring a stake in Inpex Holdings Inc., a Tokyo-based holding company whose subsidiaries are engaged in the exploration, development, supply and shipping of both natural gas and petroleum.

CIC is also looking to build up its influence. Earlier this month, the SWF announced that Jin Liqun, a vice president at the Asian Development Bank, was expected to join the company as a vice chairman. Liqun, the highest-ranking Chinese national at Manila-based ADB, served as a vice finance minister from 1998-2003, published reports state.

A Powerful Trend

These massive state-controlled investment pools are making headlines almost every day, and their cash is surfacing in deals of almost every type. Most recently, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS) - financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis.

Sovereign wealth funds currently control an estimated $3 trillion. That's already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. But Money Morning's Fitz-Gerald thinks the ultimate total will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons is more likely to reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 - more than half of them since 2005 - bringing the total number of funds to nearly 40.

In recent months, these Cash Barons have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions - most of them in the West.

News and Related Story Links:

    CIC Suffers Huge Loss from Holding of Blackstone
  • The Independent:
    EU to agree code of principles for sovereign wealth funds

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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