China: Fang Fenglei collaborates with Temasek in private equity fund

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By:
Elliot Wilson
Published on:

Singapore investment firm close to many on Goldman Sach’s team.

Fang Fenglei: a different league

Fang Fenglei: a different league

Goldman Sachs’s once invincible China team wobbled and spluttered in early December when it was announced that Fang Fenglei, the ambitious investment banking rainmaker who heads the US bank’s mainland joint venture, was setting up a $2 billion private equity fund in collaboration with Temasek.

The Singaporean state-owned investment company will contribute exactly half the fund’s original paid-up capital, with global investors pouring in the other $1 billion, including Goldman Sachs itself.

This in itself shouldn’t be surprising. Fang isn’t leaving his US employers – at least not quite yet. He will remain for now the chairman of Goldman Sachs Gao Hua, the US investment bank’s three-year-old securities joint venture. In the words of one of China’s leading investment bankers, Goldman Sachs will "bend over backwards to keep him in the fold – if they leave him, it won’t be a disaster for them in China, but everyone will say to them: ‘Well, we told you so.’" Fang has notoriously itchy feet: having helped in 1995 to set up China International Capital Corp (CICC), the country’s leading domestic investment bank, he departed to help found several Chinese brokerages. That list is a who’s who of both leading and struggling Chinese brokerages, including the Bank of China-owned BOC International, and ICEA, the securities arm of Industrial and Commercial Bank of China, the largest mainland lender.

Too much power

Fang is believed to be close to Temasek, which has snapped up minority stakes in Chinese companies in recent years, including state-run China Construction Bank and private lender Minsheng Bank. That has led many in Beijing to grumble that Temasek has become too powerful in China – criticisms that perhaps led to the sale by Temasek of $550 million-worth of shares in CCB in late November. Other key Goldman employees, including Richard Ong, the head of the bank’s overall China operations, are also close to the Singapore state investment body.

On the plus side, Temasek’s and Fang’s new fund chimes with Beijing’s desire to create a thriving domestic private equity industry to compete with such big US-based buyout firms as Carlyle and TPG. China boasts a few sizeable private equity firms, including CDH, and is helping to grow out a number of so-called industrial investment funds, including Bohai Industrial Investment Fund, the Guangdong-based Nuclear Power and New Energy Fund, and Shanghai’s Financial Fund. However, most Chinese private equity firms remain hobbled by illiquidity and their pseudo-state-run structure

Fang’s fund, dominated by well-connected investors, backed by one of the world’s most powerful sovereign wealth funds and boasting a rainmaker with an impeccable contacts book and a well-documented ability to cut big deals with even the most Communist-minded state-linked Chinese institutions, should give the fund – which still remains nameless – an edge over most foreign rivals. Analysts believe the fund’s focus on buying stakes in non-listed Chinese firms also suggests that Temasek believes China’s securities bull market, which has lasted since the first quarter of 2006, has run its course.

For its part, Temasek, which has an investment portfolio that tops $100 billion, has spent the past few years divesting its portfolio away from Singapore. The investment vehicle’s total investments in North Asia – which includes mainland China, Taiwan and South Korea – ballooned by March 31 2007 to 24% of its total overall investments, from just 8% two years previously, during which period its total domestic investments fell to 38% from 49%.

Mostly about the money

The deal will also significantly enrich Fang, a Chinese banking figure to rival US dealmaking specialists such as Joe Perella and Bruce Wasserstein. "He’s never profited in a truly staggering way from any of his deals," says a former colleague of Fang’s in Beijing. "He’s founded lots of companies and made plenty of money – and he’s a very talented banker, a rainmaker really. But this deal is in a different league – it will transfer him from the bracket of rich to the bracket of super-rich. It’s not all about the money for him – he likes the power too. But it’s mostly about the money."

If the new fund will transport Fang into the realm of the super-wealthy, it will also take the China rainmaker farther and farther away from the day-to-day operations of perhaps the world’s most successful investment bank. Individuals within Goldman admit that his new venture will mean the banker has less time to cut China-related deals for the US institution. This shouldn’t be a long-term concern for Goldman – it has a strong mainland banking team that is ranked fourth in China-Hong Kong equity capital market rankings this year, after CICC, Citic Securities and UBS – but it will in the short term hobble the bank’s operations in one of the world’s fastest-growing financial markets. Watch this space.