CITIC smashes target with $425m debut China fund(2)

CITIC Capital Partners has raised $425 million for its first China-focused private equity fund, smashing its $350 million hard cap. Investors are banking on CITIC to access control deals in Chinese state-owned enterprises.

CITIC Capital Partners has raised $425 million (€314 million) for its debut China-dedicated private equity fund, after a year of fundraising.

The firm exceeded a $250 million target and a $350 million hard cap following strong demand, according to Zhang Yichen, managing partner and chief investing officer of CITIC.

The fund, which closed officially on April 8, held an initial close on $220 million in September last year following commitments from CITIC Capital Holdings and six external limited partners, including Temasek Holdings and GE Capital. Zhang said the fund had since attracted a number of other blue-chip investors, including Siguler Guff, CDC, Orix, and Sumitomo Trust Bank.

Zhang told PEO that CITIC started marketing its first third-party China fund in May 2006, having invested in the region using its own capital since 2003. In 2005, it led a $260 million investment in Chinese drug maker Harbin Pharmaceutical, working in partnership with Warburg Pincus and a local investment firm to take a 45 percent stake. Zhang said this deal, the first from the fund, would be “indicative of the investment strategy” CITIC plans to adopt in China.

With state-owned enterprises on its radar, Zhang is confident that the CITIC brand and network across China will be useful in both deal origination and gaining approvals. “The CITIC name positions us uniquely. It gives us unique access to deals; we are perceived as a local fund; and we have close relationships with the government.”

CITIC stands for China International Trust & Investment Company, itself a state-owned investment company.

Zhang explained that while local governments are keen to privatize assets, few want to take the fall for selling to the wrong type of buyer – namely those perceived to be looking for a quick gain. Local governments take comfort in the CITIC name because it is also local, even though the fund making the investment is an offshore vehicle, he added.

CITIC intends to do control deals, but Zhang was quick to stress that this did not necessarily mean taking majority stakes. “Control is defined differently in China. Even if you own 85 or 100 percent of a company, it doesn’t mean you have control. You must align the interests of the shareholders and the management. If the latter is not on your side, you may end up with a non-performing asset.”

CITIC Capital also manages a ¥17 billion Japan-focused fund that held a final close early 2006, and two smaller US-focused funds. Its private equity program began with a $50 million US fund launched in 2003.