Goldman’s private equity deal with China state fund warrants regulatory scrutiny

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Not so long ago western private equity fund managers would show off their ties to China Investment Corporation, China’s main sovereign wealth fund.

In 2014 I paid a visit to Ardian boss Dominique Senequier’s office in Paris’ Place Vendôme. On the mantelpiece, stood a framed picture of then CIC chair Ding Xuedong who had recently visited. This was a sure sign the French fund manager had made it to the top league.

The photograph probably would not occupy such a prominent place today. Ding left CIC long ago for China’s State Council — and tensions between Beijing and the west have made the relationship between the sovereign wealth fund and the west’s largest buyout groups a tad awkward.

While western regulators have tightened their screening of direct Chinese investment in sensitive technology, they have paid less attention to Chinese state money in private equity. Revelations by the Financial Times this week that Goldman Sachs used a fund largely backed by CIC to invest in sensitive UK and US companies show they should.

The view among private equity executives is that state-controlled cash is not problematic, as long as you set aside the moral issue of tapping the dictatorships or authoritarian regimes which control many of the largest sovereign wealth funds in the Middle East and Asia.

Created in 2007, CIC rapidly joined the ranks of the most sought-after private equity backers. Major buyout fund managers — from Blackstone and KKR in the US to CVC, Ardian or PAI in Europe — count the Chinese entity among their limited partners. CIC has committed about $75bn of cash to overseas private equity funds, mostly run by US managers, says Diego Lopez, managing director at sovereign wealth fund specialist Global SWF. This is a mere drop in the $4tn private equity industry bucket and puts it behind sovereign wealth funds with a longer record of private equity investing, such as Singapore’s GIC.

Like other LPs, CIC receives a trickle of quarterly financial reporting from fund managers on their portfolios. If its representative sits on the firm’s advisory committee, it would have a bigger say in the firm’s affairs, but access to portfolio companies would be generally very limited. “They don’t have a special treatment. It’s fantasy to think that they would be able to steal secrets in this situation,” said a European buyout executive who has directly dealt with CIC.

Private equity managers also dismiss CIC’s ability to do its own deals. The sovereign wealth fund has at times put in cash directly to avoid paying hefty fees to buyout groups — one of the largest deals was its €12.25bn purchase of European logistics group Logicor in 2017 from Blackstone. CIC also held a stake in the US buyout group’s management company from 2007 to 2018, partly to get access to deals. But CIC’s attempts to go it alone coincided with heightened regulatory push back in the US and it struggled to keep enough good deal makers on staff to implement this strategy.

“They are a state entity; they have lost a lot of managers, who have tended to go to better paid, private jobs,” Lopez said.

Despite the industry insouciance, there are instances when watchdogs should pay greater attention. The Goldman fund set up in 2017 with CIC as its anchor investor is one. The US bank insists it is running the fund, but regulators should read the limited partnership agreement to be sure they are comfortable with the level of intervention and access granted to CIC.

Goldman is not the only one to have struck this kind of deal. Eurazeo and BNP Paribas set up a similar, albeit smaller, CIC-backed fund in 2019, after China’s President Xi Jinping visited Paris.

“It all depends on the level of disclosure the managers have to comply with,” the European buyout executive said. “Does CIC sit on the investment committee? Do they have access to management [of portfolio companies]? The devil is in the details.”