Renminbi fund-of-funds: Commercial remit

With a new renminbi-denominated fund currently in the market, CITIC Capital has been pleasantly surprised by the increasing maturity of domestic LPs. The National Social Security Fund and state-owned enterprises (SOEs) are showing renewed interest in the asset class, while high net worth individuals (HNWIs) are becoming more sophisticated, often delegating responsibility to family office structures.

In addition, two more classes of institutional investor - which were not active in private equity when CITIC Capital was last fundraising - are looking to participate. First, privately-held insurance companies, such as Taikang Life and Sunshine Insurance Group are following their industry peers China Life and Ping An Insurance into the asset class. Second, a handful of renminbi fund-of-funds are also being set up, with a view to helping first-time or less experienced LPs deploy capital more efficiently.

"Renminbi fund-of-funds can still get a 1% management fee and 10% carried interest from investors, which is almost impossible for foreign managers. If you could raise any fund in China, go for a fund-of-funds. Miss this window and by the next round of fundraising LPs might have trimmed the fees," Eric Xin, a senior managing director at CITIC Capital, told the AVCJ China Forum. "That's probably why many institutions are raising fund-of-funds right now."

There is a growing number of new LPs who have little familiarity with the asset class and they need advice from us – Huaijie Li

A new breed

The renminbi fund-of-funds space used to be dominated by state-backed funds with policy-driven mandates; they were sustainable only as long as long as local governments were willing to continue providing money. However, the new breed is altogether more commercially minded, whether private sector pure-plays or reformed state-backed vehicles.

Gopher Asset Management was among the early movers, getting its head start by leveraging the HNWI network cultivated by its parent, Noah Holdings, in financial products distribution. Some more recent arrivals have taken a similar route. Last year, CreditEase announced plans to offer fund-of-funds covering the full spectrum of private equity from early-stage to buyouts. CreditEase also has a readymade HNWI client base thanks to its core peer-to-peer lending business.

Shengjing Group is another interesting newcomer. Prior to 2014, the company mainly provided business and investment training to thousands of Chinese small-and medium enterprises (SMEs). It was a relatively short step from that to advising on capital deployment. Operating along the lines of a fund-of-funds, Shengjing committed RMB4 billion on behalf of its clients in 2015, supporting funds raised by the likes of Legend Capital, Matrix China Partners, and Israeli VC firm JVP.

"Domestic fund-of-funds are practicing different approaches. Some are following a traditional format, raising blind pools of capital and building a portfolio of GPs," one fund manager explains. "Others are doing it the other way around. They secure LP allocations in specific funds first and then gauge HNWI's appetite to invest. Sometimes they mix the two."

Asset managers make up another category of fund-of-funds providers. These range from mutual funds such as Harvest Fund Management to GPs like Shenzhen Capital Group. The latter has launched Qianhai Fund-of-Funds, with a target of RMB21.5 billion ($3.3 billion). In order to build its credibility, the firm also brought in Neil Shen, managing partner of Sequoia Capital China, Xiaoge Xiong, founding partner of IDG Capital Partners, and Weihua Ma, former president of China Merchants Bank, as advisors.

"Unlike JD Capital or Shenzhen Fortune Capital - which have strong in-house deal sourcing teams in major cities - Qianhai Fund-of-Funds wants to leverage existing GP networks to source deals, in particular early-stage start-ups," the fund manager adds. "Many new GPs also want to establish themselves through partnerships with Sequoia or IDG, so they are drawn to Qianhai Fund-of-Funds."

Coming commercialization

For all these new endeavors, government-backed entities remain the primary movers in the fund-of-funds space, and they too are modernizing operations. "In the past, local governments poured in money to support specific projects, but now the professionals in these government-backed funds want to become more market-driven in order to increase the efficiency of those programs and to make their own incentives more aligned with the market standard," says Dayi Sun, managing director at US dollar fund-of-funds Jade Invest. "But it doesn't mean the amount of capital available in the system has increased."

Suzhou-based Oriza Holdings, formerly known as Suzhou Venture Group, is a classic example of this transition. It was set up in 2001 as a direct investor and introduced fund-of-funds five years later, working with China Development Bank (CDB) Capital and receiving LPs commitments from large SOEs as well as from CDB. Over the past year, an element of mixed ownership has been introduced to what used to be a purely state-owned GP.

"Our fund operation has changed to become more market-driven," says Huaijie Li, a partner at Oriza. "And now, from the GP shareholding perspective, we are restructuring as well. It is part of a broader trend whereby government-backed funds want to change the way they operate and be more commercialized."

Other government-backed players are teaming up with independent fund managers to launch fund-of-funds. Most recently, Fosun Group and the Zhejiang provincial government announced plans for a RMB10 billion fund-of-funds. Redbud Capital, a fund-of-funds unit under Tsinghua Holdings, has also formed a RMB3 billion vehicle with Nantong State-owned Assets Investment Holdings.

Jade Invest's Sun compares the approach to SVB Capital, PE arm of Silicon Valley Bank, launching a fund-of-funds with the Yangpu district government in Shanghai in 2009. Numerous domestic players followed suit with a view to helping government funds that had previously underperformed due to strict requirements as to where they could invest.

Despite the increasing LP interest, raising a renminbi fund-of-funds from the likes of insurance companies remains a challenge because many of these groups are building internal asset management teams to cover private equity rather than pay a third-party manager to handle investment activity. In this sense, there are similarities with the fund-of-funds experience in developed markets.

Nevertheless, Gopher and others are busy diversifying their business, with US dollar fund-of-funds, renminbi secondaries and co-investment programs under development so as to accommodate the different demands of its LPs. They still regard fund-of-funds are a sunrise industry in China.

"There are more than 11,000 GPs in China, which might go through consolidation in the future. But there are an increasing number of new LPs who have little familiarity with the asset class and they need advice from us," says Oriza's Li. "The fund-of-funds business has strong growth potential over the next 5-10 years."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Fund-of-funds
• Greater China
• Fundraising
• LPs
• CITIC Capital
• Jade Alternative Investment Advisors
• China