The CIC-Goldman Cooperation fund explained

Where will the capital come from? How will Goldman and CIC raise the fund? Will it be a strategic or financial play?

China Investment Corporation and Goldman Sachs are aiming to raise up to $5 billion for the US manufacturing sector via their China-US Industrial Cooperation Partnership fund. We asked market sources how the fund is likely to work.

Where will the capital come from?

CIC and Goldman are splitting the investment equally, committing $1.25 billion each. The remaining amount will be raised from Chinese and US investors, Goldman chief executive Lloyd Blankfein said in an interview with CNBC.

The Cooperation Fund will target companies in the manufacturing, industrial, consumer and healthcare industries that have existing or potential business connections with China.

How will Goldman and CIC raise the capital?

Goldman’s merchant banking division will act as a sponsor and investment manager of the fund so the bank may be able to push the product through its internal private banking channels, a Hong Kong-based managing director of a placement agency told Private Equity International. The most likely group of investors in the fund would be corporates that may invest for strategic reasons, the managing director added.

It is unclear how Goldman’s plans for committing to the fund will fit with US rules restricting banks’ private equity investments to 3 percent of Tier 1 capital.

Industry sources meanwhile highlight that CIC – the world’s second largest sovereign wealth fund with $813 billion of assets – does not need any help raising capital and is well-positioned to put up half of the $5 billion fund. It might also be a difficult sell to Chinese institutional investors like insurance companies and state-owned enterprises, which are subject to capital control requirements. PEI understands CIC, which manages the country’s foreign reserves, has no restrictions for outbound investments.

Will capital for the fund be deployed for strategic or financial reasons?

Both. The $5 billion deal was among a package of more $250 billion in business agreements and expressions of interest that the Trump administration signed during the US president’s visit to Beijing in early November.

China has become a driver of global M&A and the US remains the largest recipient of its outbound M&A, with $45.6 billion worth of investments in 2016. Since 2000, Chinese direct investment in the US has grown to more than $100 billion, according to research company The Rhodium Group. CIC has underscored its appetite for the US, for example, becoming the anchor investor in AGIC Capital’s $1 billion debut private equity fund.

“When we think of big pockets of private equity capital in the Europe and US we don’t really think of CIC, it’s not at the top of our list because their programme is so full and they don’t make new investments,” a Singapore-based private equity fund advisor points out. “If there is a huge amount going into a fund like this, there must be a strategic angle.”

CIC and Goldman did not return requests for comment.