China SWF Defends Alternative Investment Acquisitions

"You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

Warren Buffett
Chairman, Berkshire Hathaway Inc.

Defense. EVP and Chief Risk Officer of China's US$200 billion SWF, China Investment Corp. recently commented that recent purchases of stakes in western financial operations with a heavy dose of alternative investments was "good".

There has been growing criticism domestically in China that the value of those purchases continues to fall, both in $ terms as the greenback continues to slide and also in the list prices of those assets: 1) CIC paid US$5 billion for 9.9% of Morgan Stanley. 2) CIC paid US$3 billion for 9.3% of Blackstone Group LP's IPO

Of course time will tell whether these investment will play out. Assuming that the financial markets do not go up in flames then the probability still remain favorable that they will in fact work out well. How well and when will be the real issue.

What next? I speculate that a few options will now drive the investments of a heavily capitalized SWF. These could take it away from investing in firms or funds that have potential exposure to subprime and its derivatives: a) A global HFoF operation with a blue-chip name and limited exposure to illiquid securities (a Bridgewater-type of business) 2) An Asian specialist in Distressed Debt 3) A global commodity player (like a Cargill?) and/or 4) A major mining operation. Time will tell which approach will be followed. Mahalo.