Chinese Capital Remains Grand Prize

Source: Financial Times   01/15/2008

Ailing financial institutions in desperate need of capital have been able to exploit the emergence of sovereign wealth funds looking for higher returns, revealing the competitive dynamic among these giant investors in the process.

The Kuwait Investment Authority had watched its neighbour and peer the Abu Dhabi Investment Authority with envy when it secured an agreement with Citi for its first capital raising. Similarly, the Government of Singapore was a candidate to provide the rescue finance for Morgan Stanley before Morgan Stanley turned to China Investment Corp, according to people familiar with the matter.

In reaching out to the KIA, ADIA and the Government of Singapore, Citi has tapped the coffers of some of the world’s most sophisticated investors. Yet, for many institutions, it is China that is the grand prize, not so much for its deep pockets but because having a competitive edge in the

China market has become so important.

Singapore’s capital and competence cannot quite compensate for the scale and promise of Chinese economic growth.

Carlyle Group, for example, has long sought a capital infusion from Asia, to complement the stakes it sold to Abu Dhabi’s Mubadala investment arm and Calpers, the

US pension fund. It has held talks with the Singaporeans but would prefer to get money from

China, in the hope that deal flow will follow, according to people familiar with the matter. Yet securing investment from

China can be a fraught process, subject to political imperatives and interference as much as commercial considerations.

China Development Bank had been in talks with Citi, and was considered the most likely source of finance for the bulk of the deal just days before Tuesday’s agreement was announced, according to people familiar with the matter. But at the last moment, the Chinese bank pulled back. That may be because

Beijing was unhappy with CDB, according to one person actively involved in the bank, because it was seen to be too aggressive in previous deals.

Because

China is a young player in global deals, its investment arms are still learning how the game works. At the same time, arms of the government, such as China Development Bank or China Investment Corp, are subject to competing instructions from

Beijing.

But nothing shows the competitive pressure more than the way both GIC in

Singapore and KIA have transformed themselves – literally in a matter of weeks.

Both had a reputation as being conservative investors. But with the meltdown in US debt market and the presence of other investors who can commit billions of dollars in just a few weeks – as CIC did with Blackstone and ADIA did with Citigroup – both GIC and KIA have become swifter, more aggressive investors.

Many bankers were amazed GIC would write a check for nearly $7bn. Meanwhile, in an interview with the Financial Times last month, Bader Al-Sa’ad, head of the KIA, noted that if the KIA could not make decisions as swiftly as ADIA,

Kuwait would miss a rare opportunity.

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