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China Investment Corporation and Barclays – the deal that almost was

Euromoney’s investigation into Barclays’ Gulf deals reveals the apparent appetite of CIC, China’s sovereign wealth fund, for securities in the UK bank in the 2008 crisis. This casts a light on the shifting sands in the portfolio strategies of sovereign funds in recent years.

This week, a Euromoney investigation into Abu Dhabi’s £3.5 billion investment in Barclays in 2008 revealed an astonishing insight into the battle for a portion of the £110 million fee paid by Barclays to Sheikh Mansour bin Zayed Al Nahyan, the emirate’s cornerstone investor in the bank. The deal, the subject of an investigation by the UK’s Serious Fraud Office, raises serious questions for shareholders, relating to the structure of the deal and the ownership of the securities in Barclays.

The documents also highlight how a number of strategic investors were approached to invest in Barclays by the dealmaker Amanda Staveley and her firm PCP Capital Partners. Despite Barclays’ public courtship of Sheikh Mansour, Staveley sought out other investors in late 2008, including Larry Fink, head of New York-based investment house BlackRock, and billionaire former Thai prime minister Thaksin Shinawatra. Perhaps more notable, however, was the investment pitch to the China Investment Corporation (CIC), China’s biggest sovereign wealth fund.

The dossier of documents relating to the transaction seen by Euromoney cast light upon the world of courtship between dealmakers on behalf of Western banks and the fund. The documents reveal CIC’s apparent interest, in principle, in the Barclays transaction in 2008, soon after taking a $5.6 billion stake in Morgan Stanley in December 2007, raising the prospect of strategic interest in the Western banking sector. This apparent appetite contrasts with CIC’s portfolio strategy in recent years, focusing upon growing heavy North America and emerging markets exposure, and alternative, direct investments. The chain of emails also highlights CIC’s approach to deal-making – during a distressing episode for the global financial industry – and the fund’s long-term investment objectives.

A seemingly cavalier attitude by Staveley to one of the world’s largest sovereign wealth funds provides some context to the Barclays-CIC courtship in 2008. Euromoney reveals that Porter Bibb, managing partner of US merchant bank MediaTech Capital Partners, contacted Fei Zou, managing director of the equity investment department at CIC in Beijing, on December 4 2008 about the Barclays transaction. Bibb’s email to Zou stated: “Because it was more than a little difficult for Amanda and PCP to put together [the deal] with Barclays, Sheikh Mansour, and the Qatar Investment Authority, it has taken longer than expected to firm up. She is in Dubai, sorting out which pocket the securities will come from, but will call you as soon as possible with confirmation of your request for £500 million of 14% RCIs [reserve capital instrument] plus warrants and details regarding costs and closing.”

However, Zou was unhappy with this chain of communication and sought to clarify CIC’s investment philosophy. On December 5 he wrote to Staveley to express this disappointment. “As expected, the senior management who were previously briefed on the potential deal with Sheikh Mansour and QIA regarding Barclays were more than frustrated by the current outcome. As an organization that is already over-weighted in the financial sector, our primary motive to entertain this potential opportunity is very simple – trying to establish strategic relationship with our counterparts in the Gulf region. We believe [,] in a world that is in desperate need of capital, our alliance will prove to be powerful and profitable.”

The latter point is a sobering reminder of how CIC, and other pools of state capital in emerging markets, were cast as the saviours of Western capitalism during the financial crisis – an image CIC was clearly conscious of. Having joined CIC in early 2008, with the fund established some months prior, Zou was looking to deploy the CIC’s $200 billion warchest, just as global credit markets froze up, leaving the CIC in an exceptional position: a multi-billion dollar fund with excess cash at its disposal.

However, even as Zou was building the fund’s proprietary equity and portfolio management capabilities, he explained in no uncertain terms that, though the fund would consider investing opportunistically, its central aim was to invest for the long-term. He also revealed CIC’s strategic goal of co-operation with other sovereign wealth funds in order to benefit from their experience, contacts and knowledge.


Zou said in the same email: “The sequence of how things developed since we were first approached proved to be troublesome. From our perspective, the entire engagement is more about relationship than economics or profit maximization...I believe the reason why you decided to approach us was also for long-term relationship. However, if we let things sit where it stands today I am afraid it will have serious long-lasting negative impact to the relationship between CIC and the organizations you are representing. That will be worse than if we never had any contact with each other.”

Zou restated his reputational risk concerns in a parting shot: “As the highest profiled investment organization out of China, and an organization with a deep pool of capital and unmatched connection in China, we take credibility seriously, and we only value people and organizations what [sic] think and behave alike.”

These emails describe one deal-making incident almost five years ago during an exceptional episode in global finance. Nevertheless, they provide an interesting retrospective by highlighting CIC’s long-term perspective, aspects of its investment strategy and how the flow of information to strategic emerging market investors was sporadic and intermediated through seemingly opaque, opportunistic channels. On the latter point, it’s worth noting that since 2008 CIC has now “built up a lot more internal capability and expertise and formalized its investment decision-making process,” says one SWF analyst. “This means that there are far more checks and balances today than when it started... and the knock on effect is that deals have to come in through formal channels.”

The prospect of a CIC investment in Barclays also sparks the intriguing question as to whether the UK bank’s business model would have been fundamentally boosted given the opportunity “to grow mainland [investment banking and wealth management] China exposure and possible [fees for M&A] advisory,” says Michael Maduell, president of the SWF Institute.

In any case, CIC's appetite for Western bank exposure in 2008 contrasts markedly with its investment slant today, says Maduell. “Western financials are not attractive [for the likes of CIC]. Most of the large SWF deal making has been purchasing financials in emerging markets like Turkey, China and Malaysia where the middle class is growing. Western financial firms that are attractive [for CIC] are private equity firms and asset managers, not big banks and insurance companies. Dodd-Frank and other regulations have an impact [on appetite towards US and UK banks].”

Although Sheikh Mansour generated strong returns from the securities in Barclays, SWF investment in Western banks is littered with reputational risks and the prospect of paper losses, from CIC’s initially much-maligned investment in Morgan Stanley, Singaporean SWF Temasek’s acquisition of a stake in Bank of America and the Abu Dhabi Investment Authority’s investment in Citigroup.

Winnie Deng, a sovereign wealth fund specialist at Shanghai-based fund consultancy Z-Ben Advisors, adds: “We have seen CIC take direct investment exposure in emerging markets and to infrastructure assets in the UK and Australia, rather than Western financials.”

For now, SWF investment in Western banks is opportunistic, rather than strategic, with the likes of CIC opting for Western private equity firms and infrastructure firms as a cleaner means of long-term Western macro-economic exposure.

In short, the investment case for Western banks is still unclear, given market abuses, economic conditions, regulation and challenged business models. As a result SWFs, compared to the 2008 heyday, lack confidence in punting on bank equity valuations and the peaks and troughs of credit cycles.

CIC and Barclays have lived to tell the tale but the emails highlight how different things might have been.

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