Chinese government has long been committed to ending poverty in an effective and sustainable way. Authorities have achieved desired results in poverty-stricken areas by replacing subsidies with investments, and SDIC Fund Management is a pioneer in this way.
SDIC Fund Management, as a subsidiary of State Development and Investment Corporation (SDIC), manages assets over 34 billion RMB and positions itself as a market-oriented private equity (PE) fund manager focusing on poverty alleviation. China pledged to alleviate poverty and improve people's living standards in its 14th Five-Year Plan. SDIC Fund Management plays a crucial role in this process by distinguishing itself as the benchmark of "S" factor in ESG investment.
Operating a poverty alleviation PE fund comes with various challenges. For example, there could be a mismatch between the fund's maturity and investment cycle of projects; locations and industries of investment projects strictly revolve around poverty alleviation; fund managers need to deal with immature enterprises in a risky business environment. Compared to normal PE-invested projects, poverty alleviation funds’ projects often have lower qualities and generate returns below the investors’ expectation. Additionally, project sourcing relies heavily on local poverty alleviation offices with lower returns and higher risks, which will bring more challenges for financial management and risk control.
Lack of a successful model also impedes the poverty alleviation PE funds. These funds are neither fully market-oriented funds that chase high returns, nor normal poverty alleviation funds guided by government finance departments that generate social benefits through donations and assistance. Poverty alleviation PE funds require fund managers to make market-oriented investments to help local industries in poor areas, thereby generating both social and economic benefits.
SDIC Fund Management has seen significant successes of its poverty alleviation funds, despite the difficulties and challenges. As of November 2020, the four funds managed by SDIC Fund Management had a total AUM of 34.725 billion RMB, and invested in over 160 projects with a total investment exceeding 34 billion RMB. In its investment portfolio, over 12 billion RMB was invested in 72 projects in poverty-stricken areas, generating 5.3 billion RMB employee’s income to 630,000 jobs and 3.9 billion RMB annual tax revenues to local governments.
SDIC Fund Management has been improving its investment portfolio by implementing a methodology consisted of five key strategies:
Leveraging the stability and industry resources as a state-owned capital
Focusing on key industries such as modern agriculture, high-end manufacturing, mineral resource development, pharmaceutical and healthcare, production and sales of agricultural products, and industrial finance.
Giving priorities to industry leaders in state-owned, private, and foreign-funded companies
Continuously optimizing the investment portfolio to balance social and economic benefits
Establishing local sub-funds to collaborate with private capital of 280 billion RMB for poverty alleviation efforts
Furthermore, SDIC Fund Management has fully explored the potential of "mutual benefit" to ensure that these funds can take root locally and achieve results. On the one hand, investments in production, job creation, and income-generating assets (such as land transfers) will benefit local residents directly; on the other hand, local residents will be encouraged to engage in business activities and achieve mutual benefit by paying taxes and fees, as well as investing in infrastructure for commercial operations.