China SWF eyes US alternatives

SAFE, the $3.3trn Chinese sovereign wealth fund, has reportedly set up a second New York office to source private equity and real estate deals.

China’s State Administration of Foreign Exchange (SAFE), the sovereign wealth fund in charge of managing China’s $3.3 trillion in foreign reserves, has set up a second New York office dedicated expressly to exploring investment opportunities in alternatives – particularly private equity and real estate, according to a Wall Street Journal report.

The new office, reportedly staffed by around a dozen professionals, is part of SAFE’s push to diversify away from US government debt amid rumours of the Federal Reserve cutting down its quantitative easing program. As of March 2013, SAFE held $1.25 trillion of the US’s Treasury securities, according to the Treasury’s most recent figures – the most of any holder.

In its effort to diversify, there are rumors that the Chinese giant is planning to allocate 5 percent to alternatives altogether. It remains unclear whether SAFE’s activities will mainly comprise fund commitments to managers or direct investments, the latter of which has gained popularity with a number of Asian sovereign wealth funds.

SAFE could not be reached for comment at press time.

Apart from New York, SAFE has offices in Hong Kong, London and Singapore, and before now would always buy government debt from those offices, according to Cindy Qu, analyst at Chinese financial research firm Z-Ben Advisors. In the past, such bonds were considered a level and stable option, but that is getting to be less true now.

This newly-opened New York office will be the first one SAFE has dedicated solely to alternatives, Qu said. For the past few years, Qu has seen SAFE invest more in real assets overseas – such as real estate and infrastructure – but the foreign reserves manager has been cautious, and very little of its investment activities have been made publicly available.

“SAFE is struggling to find a way to put its money to work,” Qu explained. “Much of their money just sits there and doesn’t have any use.”

Since the sovereign wealth fund has little experience in overseas investing, Qu believes that SAFE will start out by allocating only $10 billion to alternatives worldwide for the first few years, as a way of testing their own capacity. 

The interest in the US makes sense given there is so much liquidity available in China, according to Gaw Capital Partners’ chairman and managing principal, Goodwin Gaw. He told PERE that a good number of Chinese LPs and institutions were looking to put capital to work overseas. He predicted that SAFE’s overseas investment strategy would be similar to that of other sovereign wealth funds, splitting into both funds and direct investments.

Judging from SAFE’s past investment activity, Qu thinks it will seek out mostly well-known global fund managers with whom it has made commitments before such as TPG; it committed $2.5 billion to TPG’s Fund VI, for example. More than private equity managers, however, Qu thinks SAFE will be looking more to buy shares in companies or listed properties, or even at investing in REITs. “This is a more secure method to them,” she said.

This is not the first time SAFE has tried to diversify away from government debt, but its past few attempts have not been very successful. For example, it reportedly invested $2 billion in British oil giant BP and $3 billion in French oil company Total just before the global financial crisis. Since then, the shares of these companies have dropped 24 percent and 28 percent, respectively. A 2009 Financial Times report estimated that SAFE had lost $80 billion from all its equities investments combined.