29 March 2019

BDA’s Euan Rellie speaks to Reuters about Chinese acquisition of US firm amid trade tensions between the two countries


Goldman’s China-backed fund bucks trade tensions to buy U.S firm

By Harry Brumpton, Echo Wang, Liana B. Baker

Goldman Sachs Group Inc invested money from China’s sovereign wealth fund in a California-based industrial company and is looking for more U.S. deals, three sources familiar with the matter said, even after increased scrutiny from Washington all but stopped U.S.-China deals last year.

The Wall Street bank is managing a private equity fund called China-U.S. Industrial Cooperation Partnership LP, which it launched with state-owned China Investment Corp (CIC) in November 2017 on the sidelines of U.S. President Donald Trump’s visit to Beijing.

The fund invested alongside Goldman to buy Boyd Corp, a Pleasanton, California-based manufacturer of rubber seals and gaskets, for $3 billion last September, the sources said.

Chinese efforts to invest in U.S. companies have been tripped up over the past year by Washington’s concerns the Chinese were gaining control of sensitive technology or companies that played key roles in the economy.

Reuters reported on Wednesday that the Committee on Foreign Investment in the United States (CFIUS), a U.S. government panel that scrutinizes deals for national security risks, asked the Chinese owner of the dating app Grindr to divest it, spurred on by data privacy concerns.

Goldman successfully argued to CFIUS, however, that its plan to buy Boyd should be allowed to proceed, the sources said.

CIC’s novel partnership with Goldman illustrates how China is adapting to U.S. curbs on its deal-making, which resulted in Chinese acquisitions of U.S. companies plunging by 88 percent year-on-year in 2018, according to financial data provider Refinitiv, as trade relations between the world’s two largest economies deteriorated.

The Cooperation fund was set up expressly to help U.S. companies penetrate the Chinese market. And the fund is touting CIC’s involvement as a strategic advantage in accomplishing this goal.

In a confidential marketing document prepared for Goldman clients and seen by Reuters, the New York-based bank highlighted CIC’s “efficient sourcing of commercial partners and customers,” promising to “bring new pathways for growth via China.”

“The Cooperation fund is a U.S. fund run by a U.S. manager, and is managed to be in compliance with all laws and regulations, including CFIUS,” a Goldman spokeswoman said.

A spokesman for the U.S. Department of the Treasury, which chairs CFIUS, said the panel does not comment publicly on individual cases.

CIC did not respond to requests for comment. The sovereign fund said last summer that it planned to press ahead with the Cooperation fund despite U.S.-China trade tensions, but details of its first deal have not been previously reported. The sources asked not to be identified because the Cooperation fund’s details are confidential.

Anchor Investor

CIC, whose assets under management are approaching $1 trillion, also has investments in other private equity funds. But CIC does not typically help companies acquired by private equity funds it invests in grow in China.

CIC also calls itself an “anchor investor” in the Cooperation fund, and the sources said it holds a sizeable minority stake that is larger than its typical private equity fund investments.

“CIC is not involved in the investment management of the fund nor the operation of the fund’s portfolio companies. CIC’s role is to help Goldman Sachs, as the investment manager, identify and pursue opportunities for portfolio companies to do more business in China,” the Goldman spokeswoman said.

The Cooperation fund, which targets $5 billion in investment capital, plans to execute between one and three deals a year on average, adding up to as many as 12 over the duration of the fund, two of the sources said.

The fund is the most advanced in a series of similar investments by CIC. In an interview with Chinese state-owned newspaper Securities Times earlier this month, CIC’s president, Tu Guangshao, said bilateral cooperation funds were a strategy to “achieve a more favorable foreign investment regulatory environment” and “remove some barriers in cross-border investment.”

Tu said CIC has inked a letter of intent for a Britain-China fund, signed a contract for a Japan-China Industrial Cooperation Fund and is “in preparation for” China cooperation funds with Italy and France.

“When you get a couple more cases like this that look successful, other sovereign wealth funds and foreign investors will adopt this model,” said James Lewis, senior vice president at the Center for Strategic and International Studies, a Washington-based think tank.

About BDA

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 20 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

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