Can Citic Group's cash tempt

Citic International shareholders to surrender stake?

Citic Group, China's biggest state-owned investment firm, raised its cash offer by 48 percent to HK$13.3 billion ($1.7 billion) to buy out minority shareholders in its Hong Kong unit Citic International Financial Holdings.

Citic Group will now offer one new share in affiliate China Citic Bank plus HK$2.16 in cash for every Citic International share the minority holders have, the unit said in a statement to Hong Kong's stock exchange. This values Citic International at HK$7.60 a share.

The higher offer takes into account the recent fall in China's stock market and is aimed at winning over minority shareholders into accepting its privatization proposal. Citic Group offered in June to pay Citic International holders one new Citic Bank share plus HK$1.46 in cash, valuing the Hong Kong company at HK$6.90 per share then. The value of this offer has since dropped after a 5 percent fall in Citic Bank's share price.

“Fund managers want more cash, rather than shares,” Kenny Tang, an associate director at Tung Tai Securities in Hong Kong, said before the announcement. Citic Bank's valuation is also unattractive and may face shrinking net interest margins in the current half-year, he said.

Citic Group was established in 1979 by former Chinese Vice Premier Rong Yiren to attract foreign capital, as the country began free-market reforms. It has 44 subsidiaries spanning broking and banking to oil exploration, and says the privatization is aimed at consolidating its financial operations.


Citic Bank Profit
Citic Bank, which is 62 percent owned by Citic Group, said last week profit rose 163 percent in the first half. The bank also said net interest margin, a measure of lending profitability, widened to 3.42 percent from 2.96 percent a year earlier.

Still, the company may not repeat this performance as growth may have peaked. Rival lenders including China Construction Bank and Bank of Communications this week cautioned their profit and loan growth would slow from the first-half.

Citic International last week reported a 4.6 percent decline in first-half profit to HK$1.44 billion ($184 million) as it wrote down a further HK$718 million in the value of structured investment vehicles.

Citic International, an investment holding company that owns a bank and two asset management firms in Hong Kong, also holds 15 percent of Citic Bank.

Lehman Brothers Holdings is advising Citic Group on the privatization.


Citic Group Profit
Citic Group, with 929 billion yuan of assets at the end of 2006, posted a profit of 6.1 billion yuan in 2006. Financial-related business accounted for 52 percent of the group's revenue and 40 percent of its profit. The group has four publicly-traded units on the mainland and six listed units in Hong Kong, according to its Web site.

After the privatization, Citic Group's stake in Citic International will rise to 70 percent, while that of Banco Bilbao Vizcaya Argentaria SA will double to almost 30 percent, according to the June statement.

BBVA, as Spain's second-biggest bank is also known, said June 3 it will spend 800 million euros ($1.24 billion) to double its stakes in Citic International and Citic Bank once the privatization is completed. The Spanish bank will own 10.1 percent of Citic Bank after the deal.


Will privatization minimize future losses and lead to a more integrated Citic Group?

Will Temasek's ventures overseas

prove profitable in the long run?

Temasek Holdings, the biggest shareholder of Merrill Lynch, said it wants to lift its stake in the U.S. securities firm as it expects the investment will boost the value of its portfolio in the “long term.”

Temasek, Singapore's state-owned investment company, paid $5 billion for a Merrill stake in December, and said last month it's committing a further $900 million. Temasek's assets rose 13 percent to S$185 billion ($131 billion) in the year ended March from S$164 billion a year earlier, Chairman S. Dhanabalan said.

“If there's an opportunity, we would like to look at it,” Dhanabalan said. “Whether we do it depends on our assessment and risk diversification.”

Merrill's shares have fallen 55 percent since Dec. 24, when the third-biggest U.S. securities firm first announced Temasek's investment. Temasek is seeking to raise its overseas investments to diversify beyond Singapore, where it already controls six of the city's ten biggest publicly traded companies by market value.

Temasek's agreement to put money into Merrill last month came after the Singapore fund manager got compensated for its initial investment. Temasek said it will use a $2.5 billion so-called reset payment for losses from its earlier purchase toward buying $3.4 billion of Merrill stock. Merrill said at the time it will book the reset as an expense, as well as $5.7 billion of additional writedowns.

The purchase would push Temasek's stake beyond the ten percent limit for foreign investors. A portion of its new stock requires regulatory approval, Temasek said.


'Long-Term Investor'
“We're a long-term investor and we're not a conventional investor in the public markets,” Dhanabalan said. “We ride out the ups and downs of the market. But we certainly look at what the returns of the public markets are.”

Temasek, which took over state assets such as shipyards and an airline three decades ago, posted an average 18 percent annual return since its inception, he said. Its biggest investments in the city-state include Singapore Telecommunications, Southeast Asia's biggest phone company, and DBS Group Holdings, the region's largest bank by assets.

“One has to believe in investing in the longer term, whether locally or globally,” said Tan Teng Boo, who helps oversee about $250 million at Capital Dynamics Asset Management in Kuala Lumpur. “The pessimism driving the Western financial institutions down is so extreme right now that for longer term investors like Temasek it does make sense to get some exposure.”

Sovereign wealth funds make up two percent of the world's stock and bond markets, Dhanabalan added, and investors “overestimate” them. There's also a perception these funds aren't set up just to maximize returns because of a lack of governance and transparency, he added.

Temasek is often considered Singapore's second sovereign wealth fund. Government of Singapore Investment Corporation, or GIC, manages more than $100 billion of the country's reserves.


Although Temasek has shown interest to raise its stake in Merill Lynch, will it be able to earn regulatory approval?

Is Shanghai willing to loosen up

on tax and quotas to be China's equity center?

Shanghai should offer tax breaks and investment quotas if it wants to attract buyout firms away from Tianjin, Beijing and Hong Kong to become China's private equity center, firms including Bain Capital LLC and TPG Capital say.

Shanghai imposes tax rates of up to 35 percent on private equity and venture capital firms under limited partnership structures and charges 20 percent on capital gains earned by non-executive partners, according to new rules announced on August 14. In Hong Kong, capital gains are exempt from taxation and the corporate tax rate was cut to 16.5 percent in October.

“While Shanghai offers more investment opportunities, Hong Kong certainly has an advantage in tax and legal aspects,” Jonathan Zhu, a Hong Kong-based managing director at Bain, said at a seminar hosted by the Shanghai government. “It's also extremely difficult for private equity firms to raise money on the mainland.”

Foreign buyout firms such as Bain and TPG are seeking to tap China's 43.9 trillion yuan ($6.4 trillion) of deposits as well as acquisition opportunities to capitalize on economic growth that topped ten percent for ten straight quarters. With China's stock market off over 50 percent this year, many funds are seeking returns from alternative investments such as private equity.

Shanghai, home to the nation's largest stock exchange as well as markets in commodities, index futures and foreign exchanges, is playing catch up with Hong Kong to become a global financial center.

The eastern city also lags behind the capital Beijing, the country's political decision-making center, and the northern city of Tianjin, the first to allow buyout firms to set up in 2006, in developing a private equity industry.


Shanghai Needs Incentives
Fang Fenglei, a partner at Goldman Sachs Group in China who founded Hopu Investment Management in 2007, says Shanghai should lobby the central government for special quotas for foreign buyout firms, similar to the qualified foreign institutional investors program, also known as QFII, for stock investments.

Beijing-based Hopu Investment, which raised about $2.5 billion for its overseas fund, received more than $300 million from Goldman and $1 billion from Temasek, Singapore's state-owned investment company, people familiar with the plan said in April.

As part of an incentive plan, Shanghai's Pudong financial district plans to grant rebates of as much as 40 percent on personal income tax payments by senior executives of private equity firms based there, according to Yan Xu, deputy district director. It will also offer one-time cash bonuses of up to 200,000 yuan.

China is encouraging the creation of domestic private equity funds to challenge the dominance of foreign firms such as The Carlyle Group and TPG. The government has so far approved ten domestic buyout firms, Fang said.

Neil Shen, founder and managing partner of Sequoia Capital China, said he recently registered a fund in Tianjin.

Tianjin's Bohai Industry Fund was the first domestic, yuan-denominated private-equity fund set up in China. Its shareholders include Bank of China Group Investment, China Life Insurance and China's Social Security Fund.


Should Shanghai give more investment incentives, will it be able to catch up with Hong Kong?

Will Dai-ichi secure more returns from hedge funds?

Dai-ichi Mutual Life Insurance, with more than 30 trillion yen ($274 billion) in assets, will invest more money with hedge funds to safeguard returns as financial markets falter.

Tokyo-based Dai-ichi Mutual, Japan's second-largest life insurer, currently invests in more than 100 hedge funds as well as funds of hedge funds, Yuji Hirai, manager of the firm's structured and alternative investment department, said in an interview in Tokyo. He declined to provide specific targets for hedge fund allocations.

“Our goal is to increase our allocation to hedge funds,” said Hirai, 40. “We're in a difficult market, no doubt, but for hedge funds chasing absolute returns, this is the time to prove their outperformance.”

Hedge funds struggled to attract capital this year after the U.S. housing market collapse and ensuing credit crunch crimped returns. They collected $29 billion of new money in the six months through June, down 75 percent from a year earlier, as the industry turned in its worst first-half performance in two decades, according to Hedge Fund Research.

Dow Kim, the former head of trading and investment banking at Merrill Lynch, dropped plans to start a hedge fund after investors backed out, people with knowledge of the matter said.


Dai-ichi Returns
In Asia, the industry has fared better. Assets invested in hedge funds focused on the region grew 0.25 percent in the second quarter, as performance losses were offset by capital inflows from investors, the Chicago-based industry researcher estimates.

Dai-ichi Mutual began systematically investing in alternative assets including hedge funds in 2001, according to Hirai, who heads a team of 11 managers including one in London and one in New York.

Insurance companies “have to meet their own investment targets and I would be fairly confident that just like pension funds, their traditional portfolios are hurting right now,” said Rory Kennedy, chief operating officer of Tokyo-based United Managers Japan, a fund adviser. “It would be natural for them to increase their exposure to alternatives. The volatility across the world now is opening up opportunities.”

Allocation to hedge funds is currently in the “single-digit percentage” of assets, Hirai said. Most of the funds are run by managers in the U.S. and Europe. Hirai declined to be more specific.


'Larger Consumers'
Dai-ichi posted 3.14 percent return on assets last fiscal year beating internal targets for the first time since it began releasing figures in 2001. The company set a 3.1 percent benchmark for returns last year.

Fixed-income assets including domestic bonds accounted for more than half of Dai-ichi's portfolio at the end of March, while domestic equities and overseas securities made up 14.9 percent and 19.5 percent respectively, according to the firm's latest financial statement.

“We certainly expect Japanese insurance companies to become larger consumers of alternative investment products,” said Ed Rogers, the chief executive officer of Tokyo-based Rogers Investment Advisors Y.K., which advises clients on what hedge funds to invest in. “They are all pressed to match liabilities and assets, and investing in the absolute return space seems the only way they will be able to do it.”

Among strategies Dai-ichi invests in are so-called event-driven funds, which target companies undergoing or about to go through events such as mergers and acquisitions and asset sales; and macro funds, which can trade everything from a single stock to bond futures, Hirai said.


Seeking Opportunities
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

In one way, the global credit contagion may be playing into the hands of hedge funds, said Hirai.

The world's largest banks and securities firms posted more than $490 billion of asset writedowns and credit losses since the tumult started a year ago, forcing them to sell stakes, unload assets and fire employees.

As investment banks retrench, star employees are moving to hedge funds, said Hirai, whose team meets with about 200 funds a year.

“Even the best managers are having a difficult time keeping up their performance right now,” he said. “But it surely is an exciting time and potentially a great opportunity for them to actually create returns for investors.”



Are hedge funds the best means to safeguard returns in times of financial crisis? Which of the other asset classes can provide similar security in investments as hedge funds?

Will Hong Kong's fund management industry

maintain a fast-paced growth in the coming years?

Hong Kong's fund management industry expanded at the fastest pace in at least four years to HK$9.63 trillion ($1.2 trillion) at the end of 2007, the city's Securities and Futures Commission said in an annual survey.

The size of the industry increased 57 percent last year, compared with 36 percent in 2006, according to a report posted on the regulator's Web site.

The accelerated growth came “on the back of strong performance in the financial markets, inflows of investment funds and gain in investment mandates,” SFC said in the report.

More than 68 percent of the HK$9.57 trillion overseen by the Hong Kong industry, excluding those managed in real estate investment trusts, was raised from non-Hong Kong investors, the highest proportion in five years, said the SFC.

China's CSI 300 Index gained 162 percent last year, the best-performer among 90 major global indexes tracked by Bloomberg, tempting foreign investors to use Hong Kong to gain access to the country's stock market. Hong Kong's own Hang Seng Index rose 39 percent in 2007.

China's State Administration of Foreign Exchange cleared mainland fund management companies, securities firms and commercial banks to invest $54.6 billion of client money in international markets by June, giving a boost to Hong Kong's fund management industry.

Mainland Chinese contributed at least HK$130 billion toward Hong Kong's fund industry through the so-called qualified domestic institutional investors or QDII, a program that allows them to buy international securities.

The SFC survey covers money managers, private banks, fund advisers and insurance companies licensed for asset management businesses.


Although Hong Kong has been a promising venue for investments for the past years, how are asset managers preparing to cope with possible losses caused by declines in the global market?