China Investment Corp Goes Alternative

By: Anthony Broadfoot
Anthony Broadfoot
Anthony worked for a number of years as head of sales and marketing for stock broker companies with extensive… read more.
on Sep 21, 2012
Updated: Oct 24, 2019

According to the Wall Street Journal, China Investment Corp (CIC), the giant government-backed wealth fund, is planning to take a more active role by becoming a co-investor in a number of overseas assets. CIC has decided to partner with Brookfield, the global alternative asset manager, to explore the North Americas for timber and other alternative assets. The Chinese fund hopes to diversify its traditional portfolio and potentially hedge against inflation.

CIC’s new active position will secure tighter control over the assets it holds and might potentially deliver bigger returns down the road. By being a co-investor rather than a limited-partner, CIC will circumvent the fund-management fees and enjoy greater influence coupled with higher gains. The fund has already once entered into a limited partnership with Brookfield by contributing $200 million (£124 million) to the $2.5 billion (£1.54 billion) private-equity fund specializing in a number of alternative assets in South and North America. There is no disclosed information as to what kind of returns CIC is looking to achieve through its investment in Brookfield’s fund.

!m[](/uploads/story/433/thumbs/pic1_inline.png)Wall Street Journal reported that via their new partnership, the Canadian and Chinese funds are looking into buying assets in places such as the Pacific Northwest, where the forests are capable of providing multiple environmental and community benefits. CIC is planning to allocate $200-$300 million (£124-£185 million) of its funds to this new venture.

A major obstacle for CIC’s new investment strategy is its status as a sovereign wealth fund (SWF). Direct investments from foreign countries are often heavily scrutinized and accompanied with regulatory hurdles and especially in the case of government-backed funds. Countries such as Canada, Australia and Mongolia have all adopted changes in their foreign investment regulations that would require more thorough inspection of any SWFs looking to invest on their territory, with particular concern seemingly attached to control of natural resources.

“For any additional capital CIC receives from the Chinese government, CIC likely would allocate more of that to direct investments,” said Cindy Qu, an analyst at Z-Ben Advisors. According to her the approach could lead to “closer examination of its [CIC’s] investments because of its government-backed nature.”
The Chinese Investment Corp. was established in 2007 with the intent of utilizing China’s $3.2 trillion (£2 trillion) foreign reserves for the benefit of the state. Up to then most of the foreign currency reserves were parked in low-yielding US Treasury debt and Beijing looked at ways of not only diversifying the portfolio but also increasing its returns. CIC’s assets are valued at $482 billion (£298 billion) making it the fifth-largest sovereign fund in the world. Its returns however have been inconsistent. It registered a loss of 2.1 percent in 2008, gains of 11.7 percent in both 2009 and 2010 and a loss of 4.3 percent last year. So far most of CIC’s investments have been in infrastructure, oil, gas and mining projects – all traditional assets which not only deliver steady cash flows but also compliment with China’s huge demand for commodities and energy. This year the fund has announced that $30 billion ($18.5 billion) are set aside specifically for investments into troubled European assets with the hope that China can support the Eurozone – one of its most important export economies.

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