EMAIL DETAILS

Gents
Please read the document Lenny sent me today, you will find it below. A US
Embassy staffer met with the former CEO of the Bohai Fund in 2008 and wrote
up a report on the meeting. Me and Lin know Au pretty good he was the first
Bohai CEO and he hired Jonathan as the two of them go way back. Pretty
interesting that someone at the Embassy in Beijing would be interested in
what the domestic Bohai PE Fund was up to. Thought you guys should see this
On another note Lenny has reached out to someone over in Beijing to
ascertain Jonathans flight schedule. I still believe a meeting early next
week with the Ambassador if possible would be best, hope this has not
caused to much of an ass ache.
Thanks
Jimmy

---------- Forwarded message ----------
From: *Michael Leonard* <mleonard@thorntonai.com>
Date: Monday, January 27, 2014
Subject: Meeting with Chinese Ambassador
To: Jim Bulger <jbulger@thorntonai.com>


Jim,

I was thinking about the logic of having you, Devon, Jonathan and Hunter
meet with the Chinese ambassador in DC to talk about the fund and I was
reminded of a leaked confidential diplomatic cable that I've read which I
have copy and pasted below (link can also be found
here<http://wikileaks.ch/cable/2008/01/08BEIJING164.html>
).

In 2008 our foreign service personnel met with the then current CEO of
Bohai Group- Au Wei- who as you may recall you have had a long relationship
with. He explained to the US foreign service professionals what the Bohai
Fund's advantages in the domestic market were and what it's goals would be.
It looked like it was a very frank discussion and the contents of their
discussion was included in this cable.

Not of much consequence but I wanted to highlight the fact that it is
common for our embassies to discuss matters like this.

Regards,
Mike


VZCZCXRO4637
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0164/01 0170844
ZNY CCCCC ZZH
P 170844Z JAN 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4468
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 000164

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EB, AND INR, STATE PASS FOR USTR,
TREASURY FOR OASIA/ISA

E.O. 12958: DECL: 01/16/2018
TAGS: CH <http://wikileaks.ch/tag/CH_0.html> ECON
<http://wikileaks.ch/tag/ECON_0.html> EFIN
<http://wikileaks.ch/tag/EFIN_0.html> ENIV
<http://wikileaks.ch/tag/ENIV_0.html> ETRD
<http://wikileaks.ch/tag/ETRD_0.html> PGOV
<http://wikileaks.ch/tag/PGOV_0.html> SOCI
<http://wikileaks.ch/tag/SOCI_0.html>
SUBJECT: BOHAI FUND TO TAKE ADVANTAGE OF HOME-GROWN STATUS

REF: A. BEIJING 7356

¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#parB>B. BEIJING 614
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#parC>C.
BEIJING 3078

Classified By: Ambassador Clark T. Randt for Reasons 1.4(b/d).

Summary
------- ¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par1>1.
(SBU) The establishment of the new renminbi (RMB) 20
billion (USD 2.7 billion) Tianjin-based Bohai Industrial
Investment Fund, the first of a series of home-grown
RMB-denominated private equity (PE) funds backed by
state-owned entities, represents an effort by Chinese
authorities to expand non-bank financing options for domestic
firms. The fund is supported by central and local government
investors, but operates commercially as a PE firm that
invests solely in domestic entities. Established in late
December 2006, the Bohai Fund completed its initial round of
investments in the manufacturing and banking sectors in
October and November of 2007. Bohai Fund CEO Au Wei told us
the fund's operations will be completely commercially driven,
though the fund will maintain close ties to Tianjin local
authorities and the NDRC -- the lead agency tasked with
establishing China's PE regulatory framework. The fund enjoys
several advantages over foreign PE firms, including its
RMB-denominated status, close relationships with regulators,
and its freedom to invest in sectors that are restricted for
foreign investors. Au said that foreign PE firms face more
restrictions in China, but he expects their opportunities to
grow along with Chinese firms' demand for direct financing.
End Summary.

Home-grown private equity
-------------------------
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par2>2. (SBU)
The Tianjin-based Bohai Industrial Investment Fund
(Bohai Fund), the first RMB-denominated PE fund of its kind
in China, represents Chinese regulators' efforts to expand
direct financing mechanisms for indigenous firms through the
establishment of a home-grown PE industry. By encouraging
firms to take advantage of new financing options such as PE,
Chinese authorities aim to spare state-owned banks from too
much exposure to market risks.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par3>3. (SBU)
Established in December 2006, th Bohai Fund
operates as a limited partnership It distinguishes itself
from foreign PE firms by limiting its investments to mainland
Chinse enterprises and by using only RMB capital. n
addition, it receives its funding only fom stateowned
enterprises (SOEs) and governmnt agencies, including China
Life Insurance, Cina Development Bank, China's State Social
Security Fund, China Postal Savings Bank, and Tianjin TEDA
Investment Holdings.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par4>4. (C)
The Bohai Fund is the first fund of its kind to
receive the approval of the State Council and serves as a
pilot project on which future industrial investment funds
will be modeled. Similar industrial investment funds are
currently under interagency review including the Guangdong
Nuclear Fund, the Shanghai Financial Fund, and the Shanxi
Energy Fund. In a January 11 meeting at the fund's
headquarters in Tianjin, Bohai Fund CEO Au Wei told econoff
the NDRC plans to approve at least RMB 100 billion (USD 14
billion) in industrial investment funding each year over the
next several years to help address the growing direct
financing needs of Chinese firms. Domestic industrial
investment funds like Bohai will provide financing
opportunities to enterprises without subjecting them to
capital control related restrictions.

Economic interests will drive decision-making
---------------------------------------------
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par5>5. (C)
The Bohai Fund is based in the port city of Tianjin
and counts local government investors among its limited
partners. Over the past several months, China-based analysts
have called attention to the relationship between local
authorities and the new industrial investment funds, noting
the possibility that such funds could become financing
vehicles for local governments. Rumors have hinted at
tensions between the Bohai Fund and local authorities over
the fund's investment in a Chengdu bank.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par6>6. (C)
CEO Au -- who formerly worked as a private equity
manager for a U.S. firm in Hong Kong -- objected to such
characterizations, stating that the Bohai Fund's name gives a
false impression that the fund will only invest in the Bohai

BEIJING 00000164 002 OF 003


region. (Note: The fund's name refers to the Bohai Sea, the
innermost gulf of the Yellow Sea, which includes the port of
Tianjin and borders the Liaoning and Shandong Peninsulas. End
Note.) "The Bohai Fund's foremost concern is making
profits," Au explained, likening the fund's goals to those of
any international PE firm. He stated, however, that the
fund's investors' expectations are slightly lower than he
experienced as a PE fund manager in Hong Kong. While Bohai's
investors would be happy to achieve 20 percent returns, he
claimed, he and his staff will aim for 30 percent returns
over a 15 year time frame.

...But fund will retain close ties to government
---------------------------------------------
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par7>7. (C)
Although the Bohai Fund operates as a purely
commercially-driven entity, the fund's management maintains a
cooperative relationship with local authorities and central
government regulatory agencies, in particular NDRC.
According to Au, the fund has been well supported by Tianjin
authorities, especially Vice Mayor Cui and Mayor Dai
Xianglong. (Comment: Reftel B discusses Tianjin's efforts to
develop the Bohai Rim Economic Circle (BREC) and establish
the region as northeast China's financial center. Mayor Dai,
as former Governor of the People's Bank of China, played a
major role in obtaining the Central Government's permission
to establish pilot finance projects in the region. End
Comment.) "Tianjin wants to make itself the Delaware of
China," Au said, though he expressed reservations about the
plausibility of such plans noting the important role that
relatively autonomous state governments play in attracting
investment in the U.S.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par8>8. (C) At
the central government level, Au explained, NDRC --
in particular Director General of the Fiscal and Finance
Bureau and former Humphrey Fellow, Xu Lin -- is taking the
lead in coordinating the PE regulatory environment. (Note:
See Reftel C for further discussion of Xu Lin's generally
progressive attitude toward financial liberalization. End
Note.) Au said NDRC has helped facilitate a constructive
dialogue between the Bohai Fund and government regulators.
Under an NDRC mandate, the Bohai Fund employs a team of
several supervisors assigned to Bohai Fund headquarters from
NDRC. These supervisors provide advice and assistance to the
fund's management, although the fund is under no obligation
to follow the supervisors' advice, Au explained.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par9>9. (C) Au
told us the NDRC is now finalizing rules and
regulations governing PE, likely to be promulgated in
February 2008. The Bohai Fund, as China's primary pilot
industrial investment fund, has played an active role in
advising NDRC and other agencies on the draft regulations.
Au predicted that PE will be a regulated industry in China
long into the future, though he expects that the new
regulations will not make the PE deal process in China any
more difficult than it is in other markets, including the
U.S. (Note: According to Au, investments totaling more than
RMB 5 million or involving government entities will require
government approval, while smaller deals will likely close
without much government intervention. End Note.)
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par10>10. (C)
In Au's view, although the government has "not too
short a way to go" toward establishing an efficient PE
regulatory regime, the NDRC's commitment to change is
"genuine." Au has been impressed by the speed at which the
central and local government agencies have responded to the
development of the PE industry. However, he noted that due
to the nascent regulatory environment, he spends nearly 50
percet of his time as CEO handling political issues.

Fund will target areas off-limits to foreigners
--------------------------------------------- - ¶
<http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par11>11. (C)
Capitalizing on its unique position as a private
equity firm funded by government and state-owned entities, Au
said the Bohai Fund will take full advantage of opportunities
to invest in sectors that restrict foreign investment,
including banking and defense. The RMB 20 billion fund has
almost completed its first RMB 6 billion in investments. In
October 2007 it took a 20 percent stake in Tianjin Pipe and
in November 2007, the fund purchased a 10 percent stake in
Chengdu City Commercial Bank Co. Au said he expects to
further diversify the fund's investments in 2008. Potential
investments could include media, new energy industries,
finance, consumer goods, and agriculture.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par12>12. (C)
Au explained that the fund will focus its investments
in industries that demonstrate strong potential for eventual

BEIJING 00000164 003 OF 003


listing on a domestic stock exchange. The fund does not plan
to go after distressed assets. In contrast to foreign PE
firms, Au explained, the fund will aim for minority
shareholder positions in most of its deals, and will add
value to its assets through efforts to improve corporate
governance in advance of initial public offerings.

Implications for foreign private equity firms
--------------------------------------------- ¶
<http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par13>13. (C) Au
acknowledged that foreign PE firms face their own
set of unique challenges in China. Over the past three
years, foreign PE investors have made a tremendous amount of
money in the Chinese market. This has generated resentment
among some Chinese, who question whether so many domestic
assets should be turned over to foreign control, he
explained. In addition, he said, the country's surplus
foreign exchange reserves have created many hurdles to
foreign investors who attempt to bring more dollars into the
market. Finally, as detailed in the annual investment
catalog, China continues to prohibit or restrict foreign
investment in certain sectors. These factors, combined with
the growth in the number of PE firms competing for a small
number of deals, make China a challenging environment for
many foreign PE investors.
¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par14>14. (C)
That said, Au stated that as the demand for
innovative forms of direct financing grows, so will the
opportunities for foreign PE investors in China. Au
envisions opportunities to work in conjunction with foreign
PE firms on deals in the future and has already held
discussions with some firms about prospects for such
investments. While foreign firms bring experience and broad
portfolios, the Bohai Fund has earned the trust of the
Chinese Government and could share its local expertise in
joint deals with foreign firms, he explained.

Comment
------- ¶ <http://wikileaks.ch/cable/2008/01/08BEIJING164.html#par15>15.
(C) The Bohai Fund and other new industrial investment
funds will be inclined to use their status as
RMB-denominated, state-backed funds to focus their
investments in sectors that are off-limits to foreign PE
investors. If that is the case, Bohai and its domestic
counterparts will be less likely to emerge as major
competitors to foreign PE firms in the Chinese market.
However, by providing this new form of financing to domestic
firms in sectors for which foreign investment is restricted,
the Chinese Government has created a disincentive to the
further opening of restricted sectors, as doing so could
reduce investment opportunities for emerging domestic
industrial development funds like Bohai. End Comment.
RANDT


--
Michael R. Leonard
Vice President, Operations Department
Thornton Group LLC
14 Beacon Street, Suite 804A
Boston, MA 02108
Office: 617-248-9440
Mobile: 781-454-9227


--
James J. Bulger
Chairman
Thornton Group LLC
14 Beacon Street, Suite 804A
Boston, MA 02108
Office tel: 617.248.944