CIC close to fund deal with JC Flowers

CIC close to fund deal with JC Flowers

By Henny Sender in New York

Published: February 8 2008 00:01 | Last updated: February 8 2008 00:01

China Investment Corporation, the Chinese sovereign wealth fund, is close to an agreement with JC Flowers, the US private equity group, to put about $4bn into a new fund to invest in ailing financial institutions.

The move follows blockbuster transactions in which sovereign wealth funds from Asia and the Middle East have invested directly in beleaguered banks such as UBS, Merrill Lynch, Citigroup and Morgan Stanley.

The tie-up under discussion would differ from those deals because CIC would be investing indirectly, reflecting the growing worry among sovereign wealth funds of a political backlash as they put more money into well-known foreign companies.

The CIC would be also less vulnerable to domestic criticism if its investments went sour. CIC’s investment in Blackstone last year was criticised in China when the private equity firm’s share price fell following its listing. Last week, CIC officials were in New York meeting with Blackstone executives, among others.

As part of its lower-profile approach, the JC Flowers fund would also be less likely to invest in large financial institutions than in smaller banks and brokerages that have not been the customary targets of sovereign wealth funds. The terms for CIC would be more favourable than the standard terms for investors, according to people familiar with the matter.

Concerns on the part of the sovereign wealth funds about a political backlash have grown since the UBS investment in particular led to questions in Switzerland.

Since that deal, sovereign wealth funds have put more emphasis on the need for secrecy in talks with private equity firms regarding possible investments, according to people familiar with the sector.

In the US, Charles Schumer, the New York senator, also has called for care as sovereign wealth funds grow more active, saying: “We should be keeping a watchful eye on these investments as they increase in size and scope.”

Today, private equity firms are pouring over the financial sector for opportunities. They are considering investing through existing funds or establishing funds focusing on investments in financial institutions.

Such deals need less borrowed money than traditional buy-outs because financial institutions are already leveraged and use only a sliver of their own capital to support their extensive lending, trading and investing activities.

Buy-out deals in the financial sector make particular sense because of the current turmoil in the debt markets.

By teaming up with Chris Flowers, the Chinese are turning to one of the most well-known investors in the financial sector. Mr Flowers, who once ran financial services investment banking for Goldman Sachs, is believed to have made about $1bn on his investment in the former Long Term Credit Bank of Japan, now called Shinsei Bank.