CITIC Eyes Yuan PE Fund

SHANGHAI (Reuters) – CITIC Capital, an investment arm of China's largest financial conglomerate, is in talks with the country's national pension fund to launch a yuan-denominated private equity fund, sources familiar with the situation said on Tuesday.

The government-owned National Social Security Fund (NSSF) is expected to invest at least 1 billion yuan ($146 million) in the new fund, said three sources briefed on the plan but who asked not to be named as they were not authorized to speak to the media.

CITIC Capital's parent, CITIC Group, will also invest at least 1 billion yuan in the fund, which is raising additional money from other investors including major state-owned enterprises, said the sources.

“CITIC Capital certainly wants to have its own yuan-denominated private equity fund as soon as it can, following the industry trend,” said one of the sources.

“The NSSF is also trying to expand its private equity fund business for high returns as well as to diversify its investments,” he added.

China has at times been at odds with private equity firms, thwarting moves by foreign investors that have vied for stakes in industries deemed to be strategically sensitive.

But Beijing has pledged to develop private equity funds, especially yuan-denominated funds, and other sectors of the capital markets to reduce companies' dependence on bank financing.

CITIC Capital will manage the fund, which along with any investment by the NSSF will be subject to government approvals, the sources said.

Officials at CITIC Capital declined to comment, while a representative for the NSSF could not be immediately reached for comment.

VARIED PORTFOLIO

In 2007, CITIC Capital set up a China-focused dollar-denominated private equity fund, which currently has total commitments of $425 million from global investors, according to the firm's website (www.citiccapital.com).

CITIC Capital's China portfolio includes Harbin Pharmaceutical Group, one of China's biggest drugs firms, and Fushun Excavator Co Ltd, the country's largest manufacturer of hydraulic crawler cranes.

Its new yuan fund will also focus on China's state-owned enterprises and industrial sectors where the Hong Kong-based firm can benefit from its parent company's close ties with the government, the sources said.

CITIC Group's financial units include China's top brokerage CITIC Securities Co (600030.SS: Quote, Profile, Research, Stock Buzz) and China CITIC Bank Corp

In June, the NSSF said it had won approval from the central government to invest 10 percent of its assets in private equity funds. Based on the fund's capitalized value of 516.2 billion yuan in total assets at the end of 2007, the approved amount would be about 50 billion yuan.

Just a week after the approval, Dai Xianglong, the head of the national pension fund, announced it had agreed to invest 2 billion yuan in each of two domestic private equity funds launched separately by CDH Investments and Hony Capital.

Hony Capital is a private equity arm of China's top personal computer maker, Lenovo Group (0992.HK: Quote, Profile, Research, Stock Buzz).

By George Chen and Samuel Shen

($1=6.844 Yuan)

(Editing by Edmund Klamann and Lincoln Feast)