China family offices: In the money

Pony Ma’s elevation to the status of China’s wealthiest individual in the latest Hurun Global Rich List reflects a wider economic rebalancing. In supplanting Hui Ka Yan of Evergrande, the Tencent Holdings founder has become only the second person – after Alibaba Group’s Jack Ma – to puncture years of real estate sector dominance. Technology is making its case as a wealth driver.

Ma’s worth is inextricably linked to the Tencent share price. A 125% increase over the 12 months ended January saw the company achieve a market capitalization of $560 billion and its founder a fortune of $47 billion. He is joined in China’s top 25 by seven other internet tycoons, including William Ding (Netease), Robin Li (Baidu) and Richard Liu (JD.com) as well as Ma. It represents a gradual intrusion of the new economy into a list still largely populated by traditional industries.

All eight made their money through successful offshore listings of businesses they founded. But this wealth effect filters through the senior management ranks of these companies, creating a generation of individuals with the means and motive to institutionalize their personal investments. 

The family offices pioneering this trend – established by the founders of Alibaba, Tencent, Baidu and JD.com – cut a different profile to their traditional peers, with a strong preference for direct investments in technology. In time, they are expected to evolve into a meaningful pool of long-term capital with exposure to a diverse range of asset classes from hedge funds to private equity. 

“Family offices have emerged in China over the last decade, starting with traditional industries. More recently, we have seen more family offices coming from the technology sector. They are first generation, with young founders who still control their businesses and chase direct deals that offer strategic value to those core businesses,” says Christopher Fong, a founding partner of Hong Kong-based Welkin Capital, a PE firm founded by the descendants of four families in Greater China. 

Playing it by ear

Technology family offices are very much a product of the bootstrapped ecosystem that gave life to their founders’ ideas. A successful entrepreneur completes the journey from start-up through institutional funding rounds to IPO or trade sale, and recycles a portion of the proceeds into another generation of companies, by setting up a VC firm or investing in funds. The evolution of Banyan Capital’s LP base amounts to a series of snapshots of this process in action.    

After spinning out from IDG Capital in 2013, Banyan closed its debut fund at $206 million thanks to the close ties to local entrepreneurs. Executives from at least 20 listed internet companies committed capital through personal deposits, trusts and corporate VC arms. Some of these companies were backed by the Banyan team while at IDG and they wanted to return the favor, but the overriding rationale is aligning interests around information-sharing: the executives can bring potential investments to Banyan and also get access to the firm’s wider network.

With this support, Banyan was able to establish a track record under the new brand. By the time the firm closed its second fund in 2014, an LP base previously dominated by high net worth individuals (HNWIs) had broadened to include traditional institutional investors, including US pension funds and family offices. 

“Our LP base still comprises many tech founders, but there is a distinction between individual LPs and family offices led by these founders. If a founder is highly involved in our due diligence process, we see him as an individual LP – whether or not he is investing through a family office – in our ‘entrepreneur fund’ and we don’t charge management fees or carried interest,” says Zhen Zhang, a founding partner at Banyan Capital. “But if the founder invests in through a family office and has little involvement in our operations, he is a purely financial-driven institutional LP.”  

Meanwhile, private equity and venture capital firms established by successful founders can operate as both LPs and GPs. Shunwei Capital Partners, which was set up by Xiaomi co-founder and serial entrepreneur Lei Jun, and Yunfeng Capital, a collaborative effort between Alibaba’s Ma and David Yu of Target Media, are good examples. They were initially family offices, investing capital provided by their founders, but then opened up to external investors and become asset managers.

“We classify it as a hybrid model because this group of players have ambitions – realized with varying degrees of success – to bring in third-party capital. But in my view, more often than not they are still operating like a family office rather than an institutional fund manager,” says Vincent Ng, a partner at placement agent Atlantic Pacific Capital. 

While in some cases definitions are blurred, the tech founder who creates a single family office or similar investment platform, might assign the investment capability to a private bank or wealth management firm. The primary goal is often diversification, a crucial consideration given the wealth of many tech family offices is linked to a single listed or unlisted stock. They also tend to be smaller in size than counterparts in traditional industries and attach less importance to succession planning 

“They are more likely to be oriented towards growth rather than capital preservation. Generally, they exhibit a pattern of asset allocation favoring equities, private equity, and real estate in Asia. This is also partly a result of a ‘home-market’ bias where they tend to hold optimistic expectations about the domestic market due to their familiarity and are either pessimistic or indifferent about foreign markets,” says Lester Lim, a director in HSBC's alternative investments group. 

Strategic value

Even where there is some semblance of a structured investment portfolio that covers different asset classes, venture capital-like direct investments can generally be expected to feature strongly. This is simply the founder leveraging his sector knowledge and networks to secure high-quality deal flow, rather than being a passive LP in a third-party fund and paying management fees. 

“They are very interested to continue to grow their current businesses or look at investments related to their own businesses or industries. For example, they may acquire other start-ups in the upstream and downstream of the value chain,” says Thomas Ang, head of family office services for Credit Suisse Private Banking Asia Pacific.

To a certain extent, the investment by the family office of JD.com’s Liu in Genbridge Capital’s debut fund could be classified as a strategic move. Co-founded by former executives at JD.com, GenBridge leverages its relationship with the online retailer to generate deals and deliver post-investment value-add. According to one industry participant, this approach is consistent with family office’s objective to play an active role when making fund investments instead of being a passive LP. 

“We also see some tech family offices are making fund investments when they’re seeking exposure to segments in which they have less expertise in or where they don’t see the deal flow, such as global healthcare, real estate, energy and resources,” adds Ng of Atlantic Pacific. “They are interested in getting exposure in certain high-growth sectors, so they can develop a more diversified platform.”

Indeed, Welkin has won support from several Chinese tech family offices in an expectation of access to investment opportunities generated through the firm’s networks in traditional industries. Ancestors of Welkin’s founders helped set up Hang Seng Bank and The Mira Group in Hong Kong, household cleaning products manufacturer Shanghai White Cat, and toothpaste brand Darlie, as well as various textile businesses.

For its part, Welkin is keen to work with tech family offices because referrals from these LPs could open up an avenue of high-quality start-up deal flow. Last year, the firm led a Serie C round for Alog Technology, an e-commerce third-party logistics services provider that had previously received backing from Alibaba and Yunfeng. 

A host of independent asset managers are also trying to work with wealthy Chinese technology entrepreneurs on asset diversification initiatives with a secondary objective of getting increased exposure to the technology sector. Hong Kong-based Jeneration Capital is a multi-family office with about $2 billion in assets from a client base that includes tech founders and real estate developers. Operating under an evergreen structure, the firm mostly invests in private companies, particularly in the late-stage growth space, as well as running a public equities program. 

Through so-called “collaborative capital” provided by Chinese founders, Jeneration has backed the likes of online grocery business Miss Fresh and used-car trading platform Uxin. The firm differentiates itself from many single-family offices in that it has no affiliation to a specific technology company, which could impact the nature of deal flow. 

“China’s tech sector is characterized by that fact that it has ‘two camps’ – the Tencent camp and the Alibaba camp. In some segments, these two giants might not be that competitive, so start-up founders don’t need to pick a side. But in areas where competition between them is intense, start-ups must be careful. Some just don’t want to accept money from either of these two groups and keep themselves as independent,” explains Welkin’s Fong.  

Overseas exposure

While an independent multi-family office is not limited by affiliations, there are concerns about alignment of interests between the manager and the founders that make up its client base, most of whom are still running their companies. Industries of interest and strategic considerations may vary greatly across this group. As a result, several multi-family offices have emerged that manage investments on behalf of founders and senior management from the same large technology company. 

Hong Kong-based Blue Pool Capital, for example, represents part of the wealth of Ma and various other Alibaba luminaries, including Joe Tsai, a co-founder of the company and currently its executive vice chairman. Founded in 2015, the firm has quickly emerged as a significant player, hiring a string of in-house professionals such as Alexander West, formerly a president at Investor AB, as its managing partner and CIO. 

Blue Pool started out focusing on hedge funds and has since expanded into real estate, venture capital funds, and direct investments, predominately in overseas markets. Its direct investment portfolio features US-based tech companies like virtual reality start-up Lytro, healthcare player LifeMine Therapeutics, and media technology business Trive Global. 

“We have seen some tech family offices or investment groups, backed by large sources of capital in China, running around in Silicon Valley and making investments in private companies. But we haven’t seen them actively allocating into VC funds in the US yet,” says David York, CEO and managing director at US-based Top Tier Capital Partners. “It’s fair to say that there is some Chinese wealth trying to find its way to the US to diversify and be managed professionally through fund-of-funds or other structures. It’s still early, but my sense is that it will continue to grow.”  

The continued expansion of China’s technology sector means there is no shortage of wealth being created. This will in turn stimulate interest from entrepreneurs in establishing vehicles to manage their money. However, at the same time, these vehicles will mature. Most tech family offices are still in the midst of strategy exploration, establishing which approaches best fit their needs. The line between corporate interests and personal wealth creation is also blurred because these are first-generation founders who have yet to consider succession issues. 

Over the next 10 years, some of these pioneers will retire and their family offices will enter a different phase. Connections to the corporate parent are likely to loosen as members of the second generation become more involved in setting asset allocations and shaping investment strategy. While the technology sector is generally expected to be the main driver of family office growth in China, their wealth will dissipate across a wider variety of asset classes. 

“After Chinese founders experience generational transitioning, more tend to consider family offices as an option to [preserve or create new wealth]. They often follow the model of mature markets, outsourcing or commissioning investment capabilities to third-party professionals, and allocating capital into different asset classes, not only technology VC investments,” says Mingchen Xia, a managing director at Hamilton Lane.   

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• Topics
• Greater China
• LPs
• Fundraising
• China
• Banyan Capital
• Family office
• Top Tier Capital Partners