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Rothschild Drawn To Outbound Chinese Funds

21 July, 2011

For decades foreign investors have poured into China, but today the flow of funds in the other direction – Chinese money going overseas – is also luring bankers.

Lord Rothschild, chairman of London-listed RIT Capital Partners, is one such newcomer, having travelled to Beijing this week to work on a new private equity fund that will raise renminbi in China and invest it overseas. The fund, J. Rothschild Creat Partners, aims to raise $750m by the end of the year from Chinese companies, and is one of the first such funds to gain regulatory approval.

China’s capital controls and currency that is not fully convertible make it difficult for Chinese individuals and companies to invest overseas. This dearth of investment opportunities, combined with negative real interest rates, has pushed investors into sectors such as real estate or physical commodities such as gold.

The capital markets have been opening up gradually to allow outbound investment but the process has been slow, starting with equities through a tightly regulated scheme and moving on to outbound private equity funds only this year.

Two such funds have been approved so far: A-Capital Asia, which is building a Rmb3bn ($465m) renminbi and euro fund, and Lord Rothschild’s group, a joint venture between RIT Capital, Creat Group, the Chinese investment conglomerate, and Quercus Associates, the investment advisory company.

Foreign banks and funds including Blackstone, Goldman Sachs, Morgan Stanley and Carlyle have already set up renminbi-denominated private equity funds in China, although these focus mainly on domestic investments.

The Rothschild family first came to China in the 1830s, and ran a small business trading gold and silver out of Shanghai. Today the family name is perhaps best known in China by association with Chateau Lafite, the Rothschild wine in high demand among wealthy Chinese.

That growing spending power from China and other emerging markets is something that Lord Rothschild is counting on to drive returns from the new fund. After seeing Shanghai and Beijing, and taking the high-speed train between the two, Lord Rothschild believes domestic consumption in emerging markets could replace the commodities cycle as a dominant investment theme.

Lord Rothschild says the fund will focus on sectors that can benefit from the Chinese consumption boom, including clean energy, pharmaceuticals, natural resources and brands. They are looking for “opportunities outside China which are complimentary to, symbiotic to, Chinese interests here and Chinese industry”, he said.

“For many local companies, especially private companies, it is very hard for them to go outside of China to invest,” said Cindy Qu, analyst at Z-Ben Advisors in Shanghai. “This type of private equity fund can work with these companies and help them go out of China to do overseas investment.” Ms Qu said the Shanghai city government is also planning an outbound private equity fund of Rmb10bn.

Creat Group is an investment conglomerate with interests ranging from real estate to agriculture to mines, pharmaceuticals and even juice. It was founded by Zheng Yuewen, a former railways ministry official who became an entrepreneur and bureaucrat and is vice-chairman of the All-China General Chamber of Industry & Commerce.

The QDII system that allows Chinese funds to invest in overseas equities was launched in 2006 and has $72.6bn in quota allotment, small in comparison to China’s vast savings. 

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Rothschild Drawn To Outbound Chinese Funds

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