Money

SSF sees profit in tight money policies

By Cai Xiao (China Daily)
Updated: 2011-06-28 10:05

BEIJING - The National Council for Social Security Fund (SSF), China's largest limited partner, is contacting and investing in private equity (PE) companies, and regards the tightening monetary policy as a huge opportunity in the development of the PE market, said a senior official from the SSF.

"We have committed to invest a total of 17 billion yuan ($2.63 billion) in about 100 companies, and 10 billion yuan has already been invested," said Wang Zhongmin, vice-chairman of the SSF.

Wang said the SSF has recently signed an agreement with a PE company, and it is engaged in due diligence investigation with two others. It's also in preliminary discussions with tow others. He did not disclose the names of the companies.

Related readings:  China's pension fund increases tenfold  China's social security fund to invest 10b yuan in CDB  China's social security fund worth 856.8b yuan by 2010  Social Security Funds may hit 1t yuan

The SSF has cooperated with nine PE firms investing in 11 funds. The companies include CDH Investment, and IDG Capital Partners.

"Of course, we have close communications with a number of funds," Wang said. "All information shows that we work hard but are cautious in investing."

Wang said that under a tightening monetary policy, short-term interest rates rise quickly and companies have difficulty in guaranteeing liquidity. In these circumstances, they turn to venture capital and private equity for help.

"For the banks most sensitive to liquidity, a common way of raising money is from the equity market, by additional equity offerings or a subordinated debt issue," Wang said, adding that this can present an opportunity for PE firms because the price-to-earnings ratio of bank shares is low."

Wang said that the listed banks' average price-to-earnings ratio is about 10 times, while that of non-listed banks is about 7 times. When a PE company is able to buy a bank's shares at a price of 6 times, because the bank needs to raise its liquidity, the investment is better than is generally possible in other sectors.

"State-owned enterprises also face liquidity pressures sometimes, and when they do, they loosen their equity control," said Wang. "Private enterprises are most likely to be hit by the pressure, and lowering their equities' prices is the main way for them to attract equity investment and save themselves."

Private equity companies must register with the National Development and Reform Commission before they can receive money from the National Social Security Fund.

The Chinese PE market is still in its infancy and is short of strong limited partners. Leading PE companies, including Blackstone Group LP and Carlyle Group, are seeking cooperation with the SSF.

The SSF is raised mainly from capital and equity assets. It can invest about 100 billion yuan as private equity.