NSSF mulls further private equity allocations

ChinaÆs National Council of Social Security Fund (NSSF) says it has achieved a realised gain of 38.7% or Rmb145.3 billion ($20.8 billion) on its investments in 2007. Its total asset size is now Rmb516.2 billion ($73.8 billion).

The fundÆs management committee has also announced a restructuring of its executive posts. The change of leadership has come as the last committeeÆs second term expired. The current management on the fundÆs third term includes a total of 21 executives.

Dai Xianglong, the mayor of Tianjin and mastermind behind the æThrough TrainÆ programme, was appointed to replace Xiang Huacheng in January this year. Previously, he was a president and party secretary at the PeopleÆs Bank of China.

Dai hopes to see better returns for the fund, predicting that total assets could double to Rmb1 trillion ($142.9 billion) by 2010.

The current committee has set a target to modernise the fundÆs management structure to match international standards. It is working to improve the fundÆs operational efficiency and strengthen its abilities in risk management. Improvements to legislative oversight will also be a focus, with the committee changing the structure of executive remuneration in order to minimise staff turnover.

According to Z-Ben AdvisorsÆ data, $37.5 billion of these assets is currently managed internally. This internal portfolio includes listed stocks, long-term bonds, direct equity stakes and trust investments. Around $34.5 billion of the fundÆs assets is invested with third-party investment managers, of which $32 billion is allocated to domestic segregated mandates while $2.5 billion is with asset management houses overseas.

Meanwhile, the NSSF is expanding its investment in the higher yielding alternative universe. It is raising its allocation for private equity investments in financials, transport, and energy, while investing further in private equity funds. The NSSF is already an active investor in Hong Kong-listed H-shares.

ôThe reason its [investment return in 2007 is] 38.7% not 65% is because they carry an extraordinary amount of cash,ö says Michael McCormack, analyst at Z-Ben Advisors. Previously uninvested cash holdings added with increasing government injections have been diluting the fundÆs gains.

ôWe feel certain that they want to put that more fully to work. By the end of 2008, they would probably have about $2-$2.5 billion with international third-party managers," he adds. By the end of 2010, the amount outsourced to international managers could be as high as $15û$20 billion, he notes.

McCormack adds private equity û also at times structured as ætrust investmentsÆ in NSSF û has been dominated by a mix of equity, mezzanine and loan financing for construction, infrastructure and property projects structured into a number of special purpose vehicles to date. He notes the NSSF has been fairly opportunistic in its domestic investments, and these mandates have not been put on tender.

ôEffectively, what they are doing is giving trust managers an ideal, where the unmet needs of their portfolios are, and waiting for good ideas to be submitted to them for interest,ö he says.

Z-Ben Advisors anticipates the fundÆs total assets will only grow to $104 billion by 2010, with around 40% of the new funds to be given to foreign third-party managers.