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We're providing notes to the Embassy now on meeting purpose. Katie's submitted to Chinese Ambassador, awaiting feedback and confirm if timing is possible.

Devon Archer
646 436 3745

> On Jan 28, 2014, at 3:37 AM, James Bulger <jbulger@thorntonai.com> wrote:
>
> 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).
>
> 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 ECON EFIN ENIV ETRD PGOV SOCI
> SUBJECT: BOHAI FUND TO TAKE ADVANTAGE OF HOME-GROWN STATUS
>
> REF: A. BEIJING 7356
>
> ¶B. BEIJING 614
> ¶C. BEIJING 3078
>
> Classified By: Ambassador Clark T. Randt for Reasons 1.4(b/d).
>
> Summary
> -------
> ¶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
> -------------------------
>
> ¶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.
>
> ¶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.
>
> ¶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
> ---------------------------------------------
>
> ¶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.
>
> ¶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
> ---------------------------------------------
>
> ¶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.
>
> ¶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.
>
> ¶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.)
>
> ¶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
> --------------------------------------------- -
> ¶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.
>
> ¶12. (C) Au explained that the fund will focus its investments
> in industries that demonstrate strong potential for eventual
>
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>
>
> 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
> ---------------------------------------------
> ¶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.
>
> ¶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
> -------
> ¶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