Macquarie and China Everbright team up to raise $1.5 billion

The two are forming an asset management joint venture that will invest in core infrastructure in China, Hong Kong and Taiwan.

In a test of whether the supposed return of investor appetite will translate to actual allocations, Macquarie Group and China Everbright are hoping to raise $1.5 billion for two funds that will invest in infrastructure projects in Greater China.

David Russell, Macquarie's Hong Kong-based head of private equity for Asia and Greater China, is in the UK to help generate the buzz needed to drum up interest in the two funds. Europe is by no means the sole target, as the first of the two funds is US-dollar denominated and targets non-retail investors -- more likely to be institutional -- outside of China. That covers the whole gamut of possibilities outside of the mainland. The second fund, which is still awaiting regulatory approval, will target domestic Chinese investors and will allow yuan-denominated capital commitments.

The timing of fund raising could be tricky though, as confidence in China's stock market is generally waning. China's closely watched CSI 300 Index, which tracks the 300 most representative A-share stocks listed on the Shanghai and Shenzhen Stock Exchanges, has fallen 20% since its recent peak on August 3. Although the Macquarie and China Everbright funds are private equity portfolios, sometimes market sentiment spills over into other investments.

But Russell brushes this aside, noting that the investors that would be attracted to these two funds would be focusing on China's long-term prospects and not the current state of the equities market. Russell expects the funds to have their first closing in the early part of 2010, generating the most interest from pension funds, financial institutions such as life insurance firms, and families and endowments that are increasing their allocations to Asia.

"The equity market correction in China has been expected because valuations have run high. It is nothing unforeseen," says Russell. "Investors who are looking long-term are not looking at how equities are trading. They are looking at the cash and earnings performances of companies and their potential for growth."

A recent survey by London-based alternative assets industry data provider Preqin shows that investors still have an appetite for private equity over the longer term, and 30% intend to increase their target allocations to the asset class in the next three to five years. Around 54% of investors Preqin surveyed expected to make new commitments to private equity funds in the second half of 2009, and a further 25% said they will recommence investment in the asset class in 2010. The survey was conducted in July among 100 institutional investors worldwide.

Earlier this year, global law firm Walkers pointed out that infrastructure would be among the most popular asset classes for private equity this year, together with emerging markets and distressed banks.

A Macquarie spokesman is quick to highlight, however, that $1.5 billion is "just a target". As a show of faith on what they believe are the excellent growth prospects in the infrastructure sector in China, Hong Kong and Taiwan, Macquarie and China Everbright have committed to jointly contribute up to $100 million as sponsors of both funds.

With a specific focus on "core" infrastructure, the two funds will be managed by Macquarie and Everbright through jointly owned asset management companies and are expected to have identical mandates. These joint ventures are still being formed and it is too early to give any sort of indication about their respective structures, according to the Macquarie spokesman.

Specifically, Macquarie and China Everbright will focus on the core infrastructure of toll roads, airports, renewable energy, water, wastewater, ports and rails. These sectors are classified as "encouraged" under the so-called Catalogue of Industries for Guiding Foreign Investment, which was published by the Ministry of Commerce and the National Development and Reform Commission. This catalogue has been revised several times since it was first introduced in 1995 to help China meet its evolving policy priorities. The catalogue divides investments into three categories: encouraged, restricted and prohibited. Up until its entry to the World Trade Organization in September 2001, many sectors in China were closed to foreign investors.

Russell says part of the attraction for interested investors is the level of transparency associated with infrastructure investments in China. Not many would associate transparency with China, but those in the know are aware that because it is classified as an "encouraged" investment, foreign investors can invest up to100% in toll roads, renewable energy, water, wastewater, and ports, and up to 49% in airports and rail.

"There are several myths when it comes to investing in China," says Russell, who notes that some questions he has had to answer include whether foreign investors could invest in infrastructure in China and whether they could exit their investments and repatriate the profits.

China's Rmb4 trillion ($586 billion) stimulus package, although nearly a year old (it was announced in November 2008), still has a lot to do with the confidence in the mainland's infrastructure sector. Hong Kong and Taiwan are getting the peripheral interest because of their proximity to the mainland and increasing business ties. In the case of Hong Kong, the territory has always been considered a gateway to China. In the case of Taiwan, easing political tensions between the two have done much to improve investment prospects.

"Greater China is one of the largest and most diverse markets in the world and the market continues to offer enormous and rapidly expanding infrastructure investment opportunities," says China Everbright CEO Chen Shuang. "China has a long history of private and foreign sector investment in infrastructure, with well developed national policies promoting infrastructure investment to improve business efficiency and national wealth, while encouraging foreign capital and operating expertise."

Chen notes that $67 billion of foreign direct investment had flowed into the infrastructure and related sectors in China as at the end of 2007. He adds that the importance of private capital in Greater China is demonstrated in the nearly 60 listed infrastructure operators with a combined market capitalisation of over $150 billion.

Meanwhile, China's stimulus package, which was its answer to the economic threats of the global financial crisis, has a life span that extends until 2010. It covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. The $32 billion high-speed railway connecting Beijing to Shanghai is an example of an infrastructure project covered by the package. With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.

"Infrastructure is among the key drivers of GDP growth in China," says Russell. "We are seeing billions of US dollars invested in infrastructure projects and we expect that trend to continue."

Macquarie's international infrastructure asset and funds management experience combined with China Everbright's own local expertise is expected to benefit the management of the two funds. Macquarie is one of the largest infrastructure fund managers globally, with over 25 listed and unlisted funds managing over 100 infrastructure assets, with $36 billion of infrastructure equity under management as of June 2009. China Everbright is the Hong Kong-listed subsidiary of the China Everbright Group, a Chinese state-owned enterprise and China's first formally registered financial conglomerate.

"As a manager of infrastructure assets, we appreciate that governments, potential partners and vendors are attracted to managers with a history of responsible asset management and depth of expertise, together with an understanding and sensitivity to local issues," says Russell.

This also serves as Macquarie's first China-focused infrastructure fund, though co-managed with China Everbright. Macquarie already has infrastructure investments in China, done by way of the Macquarie International Infrastructure Fund. The firm bought a 38% interest in Changshu Xinghua Port in China in 2005 and an 81% interest in Hua Nan Expressway, a 31km dual-carriage urban toll road in the city of Guangzhou, in 2007.

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