Goldman Sachs has used a fund set up with Chinese state money to buy a series of US and UK companies, including one with a cyber security business that provides services to the British government, even as tensions rise between Beijing and the West.
The Wall Street bank has struck seven deals using cash from a $2.5 billion (€2.3 billion) private equity “partnership fund” it set up in 2017 with the sovereign wealth fund China Investment Corporation (CIC), according to multiple people with direct knowledge of the fund and its operations.
The deals include a start-up that tracks global supply chains, a consultancy that advises on cloud computing, a drug testing company and a manufacturer of systems used for artificial intelligence, drones and electric vehicle batteries. Although the bank announced it had invested in the companies, it did not say the deals were financed at least partly from the China fund.
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The deals highlight how private equity funds have helped sovereign wealth funds build up indirect holdings in companies in critical sectors as western governments have increased scrutiny of foreign direct investment, particularly from China.
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The bank’s then-chief executive Lloyd Blankfein launched the China-US Industrial Co-operation Partnership Fund during Donald Trump’s state visit to Beijing in 2017, saying it would help address Washington’s concerns about a trade imbalance between the US and China by investing Chinese capital in American companies.
The bank said CIC would be an “anchor investor” in the fund and play an active role in helping the companies it bought to expand in China.
Despite increasingly fraught relations between Beijing and the west in recent years, Goldman has stepped up the fund’s activity, making four investments in 2021 and one last year.
In 2021, Goldman used the partnership fund with CIC to help finance its purchase of LRQA, the inspections and cyber unit of UK maritime classifications group Lloyd’s Register. LRQA carries out inspection and certification services, and operates in the aerospace, defence, energy and healthcare industries among others.
The business includes cybersecurity group Nettitude, which says on its website that it is an approved service provider for the UK government and helps to “strengthen government and defence organisations across the world”. Its work includes “ethical hacking”, in which its staff attempt to hack clients’ systems to assess their vulnerabilities.
In the LRQA deal and others, the Goldman-CIC fund invested alongside separate private funds that the bank manages, meaning that the Chinese state’s financial involvement was relatively small.
Laws and regulations
But the sovereign wealth fund is more closely involved with the companies it buys than typical investors in most buyout funds.
“China represents 40 per cent of the global certification market and we are currently underrepresented there, which is something we are seeking to address in part with assistance from the [Goldman-CIC] fund”, an LRQA spokesman said. He said Nettitude had no business in China and no plans to set up there and had no interaction with CIC.
Goldman said in a statement: “The co-operation fund is a US fund run by a US manager, and is managed to be in compliance with all laws and regulations ... It continues to invest in US and global companies, helping them increase their sales into the China market.”
One UK official said the British government could not comment on any specific acquisitions given the “quasi-judicial” nature of its investment screening powers. But they added: “The government will not hesitate to use our powers to protect national security where we identify concerns.”
The fund has also invested in US companies Cprime, which advises on cloud computing; Parexel, a drug testing company; Project44, a start-up that tracks global supply chains; Aptos, a retail technology group; Visual Comfort & Co, a lighting company, and Boyd Corporation, a California manufacturer whose products include cooling systems used for machine learning and in drones, according to its website.
Project44′s founder disclosed the China fund’s investment to WSJ Pro in 2021, and Reuters reported the Boyd investment in 2019. The fund’s involvement with the other five companies had not previously been made public. The seven companies, except LRQA, did not respond to requests for comment.
CIC is also on the fund’s “limited partner advisory committee”, a term used in the private equity industry for a group of significant investors in a fund that can be consulted for advice, though they do not make investment decisions.
Chinese state money
Taiwan’s oldest insurer Taiwan Life, Denmark’s ATP pension plan, US pension manager the Minnesota State Board of Investment and several US-based charitable foundations also committed money to the fund. CIC and Taiwan Life did not respond to a request for comment. Minnesota State Board of Investment and ATP confirmed they were investors in the fund.
CIC, founded in 2007 to invest Chinese state money, had $1.35tn in assets at the end of 2021. Almost half of its global portfolio was invested in alternative assets such as private equity, according to its website.
The Goldman Sachs fund was one of several so-called “bilateral funds” that CIC set up with international investment groups to strike deals in their home countries, helping increase its exposure to western companies.
Goldman has maintained a relationship with CIC. The bank’s chief executive David Solomon met CIC’s executive vice-president Qi Bin and chair Peng Chun in March, according to a CIC statement. — Copyright The Financial Times Limited 2023
