LP interview: CreditEase Wealth Management

ROC Partners, an Asia-focused private equity investment manager that spun out from Macquarie Group in 2014, has been active in China for more than a dozen years. Operating through fund-of-funds and separately managed accounts, the firm offers clients a combination of primary, secondary and co-investment exposure. All of it in US dollars. CreditEase Wealth Management thought it was worth taking this expertise and applying it to the renminbi-denominated space.

The two firms established a joint venture about three years ago and raised a debut fund of RMB750 million ($112 million). It is now largely deployed, with three secondary deals and four co-investments accounting for more than one-third of the corpus. 

“We thought it would be a nice supplement to our in-house fund-of-funds capability, which is primarily focused on primary opportunities. It was a way of accessing best-in-market co-invest and secondaries,” says Richard Williamson (pictured), a managing director at CreditEase, who is responsible for offshore business for the wealth management unit. “We have always looked for ways to bring the best products to our clients and we are agnostic about how we do it.”

This willingness to experiment has helped CreditEase transform from a peer-to-peer (P2P) lending platform into a financial technology conglomerate with operations that extend from financing to robo-advisory to blockchain services. The wealth management division alone has grown to encompass fixed income, private markets, capital markets and insurance, with a presence in five international cities as well as 40 mainland Chinese ones. Invested assets exceed RMB150 billion.

The business is based on a network comprising 50,000 high net worth individuals (HNWIs) and hundreds of thousands of mass-affluent. The former group is served by a staff of 2,000 salaried relationship managers while the latter use online channels. CreditEase is one of a select few independent players in China that have succeeded in bringing retail investors into private equity at scale – and through its own product suite rather than acting as a distributor for third parties.

Meeting a need

Founded in 2006 by Ning Tang, a former investment banker, the company was an early mover in P2P services. It linked individual lenders to small-scale borrowers, typically rural households, salary workers, college students, and micro-entrepreneurs. It charges transaction fees and service fees on both sides. Receiving equity funding from IDG Capital Partners, Morgan Stanley Private Equity Asia, and KPCB, CreditEase launched an online consumer finance marketplace, known as Yirendai, in 2012. 

The wealth management operation started around the same time, leveraging the existing infrastructure. “P2P is introducing people with money to people without money. But those high net worth clients have a range of other financial needs in addition to P2P, which is a fixed income product,” says Williamson. “That led to the launch of the wealth management unit as the second leg of the business.”

Following an IPO in New York just over three years ago, Yirendai discloses operating data for its P2P lending but not for wealth management. To get an idea of the target market, approximately 592,000 investors committed RMB48.1 billion to the P2P platform in 2017. Together with the HNWI clients serviced through 110 brick-and-mortar outlets, CreditEase has around 500,000 wealth management customers. Annual sales across all products are RMB110 billion, with 65% from online channels.

Having initially operated as a distributor – setting up feeder vehicles that channeled HNWI money into funds managed by domestic and foreign private equity firms – the wealth management unit quickly switched to fund-of-funds, so it could have more control over product quality. CreditEase now manages more than a dozen renminbi fund-of-funds with around RMB26 billion in assets. Three-quarters are generalist, but that balance appears to be shifting.

“The size of the funds hasn’t grown that much in recent years,” says Cally Liao, a managing partner in the private equity fund-of-funds business. “The main change is that we have become more focused. For instance, angel investment and secondary fund-of-funds were only added in the last two years. We will continue to raise capital for these areas as investment opportunities grow.”

Deployment is dictated by what is available locally. With buyout strategies yet to proliferate in China, venture and growth capital funds dominate CreditEase’s products. There is a preference for renminbi vehicles launched by managers that have already established themselves in the US dollar space, such as GGV Capital, Qiming Venture Partners, IDG Capital, and Matrix Partners China. CreditEase is also a significant investor in spin-outs like Gaorong Capital and HighLight Capital.

“We like firms that have both an international vision and the ability to grasp changing trends in the China market,” Liao explains. She adds that funds launched by teams coming out of Chinese technology companies are also of interest.

Going offshore

CreditEase is guided by three principles: clients should be diversified across asset classes, they should be diversified across markets, and they should have a high allocation to private markets. International expansion, therefore, was always on the agenda. 

A Hong Kong office opened in 2013 and a debut global private equity fund-of-funds of $200 million followed two years later. CreditEase raised another $200 million for its second vehicle and a third was recently launched with a target of $300 million. The firm also manages a dedicated secondaries fund of $150 million. Total global private equity assets under management are just under $1 billion, including capital in other US dollar-denominated vehicles.

In terms of deployment by geography, the portfolio is 60-70% North America, 10-20% Asia and 10-20% Europe. By strategy, it is 60% buyout, 30-40% venture and growth, and 10% special situations and turnaround. Asked what he looks for in a manager, Seungha Ku, head of offshore PE at CreditEase, expresses a preference for middle market and sector specialist GPs with strong operational capabilities. The firm is willing to back emerging as well as established players.

CreditEase also has a presence in Singapore – from where its global real estate fund-of-funds business is run – while a fund-of-hedge-funds joint venture operates out of New York. The firm launched in Tel Aviv in 2015, teaming up with Tayman Kan and Benjamin Weiss, who made their names locally with the iNetworks 360 fund, to form the CreditEase Israel Innovation Fund. It closed on $30 million; a successor vehicle launched in late 2016 with a target of $50 million.

“Our approach is to find the right senior person and let them build out the team, it helps make businesses more stable,” says Williamson. “Anju Patwardhan, the managing partner of our fintech fund, was previously global head of innovation at Standard Chartered Bank. She joined over two years ago and has created that team. It’s been a similar experience across our business lines.”

The CreditEase FinTech Investment Fund, which is based out of San Francisco, raised $180 million plus a local currency sleeve of RMB700 million. There have been 38 investments so far across lending, payments, personal finance, enterprise solutions, and insurance. 

A broader church

Capital for offshore vehicles comes from a subset of the HNWI and family office client base with money available to invest overseas. Williamson notes that restrictions on capital flows out of China have not hurt business – offshore sales consistently account for about 30% of the total. Similarly, Liao plays down the impact of the slowdown in renminbi fundraising, observing that macro concerns have a greater influence over HNWI participation in private equity.

Nevertheless, CreditEase is looking to diversify its fundraising channels. The second iterations of the ROC joint venture and the fintech fund are expected to feature some external money, sourced onshore and offshore, respectively. An institutional sales team was recently assembled to target local LPs including the National Council for Social Security Fund (NSSF), insurance companies, and university endowments. However, no one expects a swift pay-off.

“Whether or not we get more institutional investors depends on China removing some of the limitations on participation by these groups in fund-of-funds. There are still a lot of obstacles,” says Liao. “Whether the institutions themselves will be more willing to allocate capital to professional investment firms overseeing different asset classes will be another important factor.”

It might be that CreditEase gets traction offshore before cracking the mainland institutional market, but Williamson sees the rise of external capital as a logical next step for the business. He points to Prudential-owned Eastspring Investments as an example of an Asian manager that has shifted from being fully captive to managing third-party money. Interestingly, the firm is currently executing a China expansion strategy in order to target local investors. An alternatives unit was set up last year.

“We are at an earlier stage, but we are on a similar trajectory and with a condensed timeframe,” he says. “We started out as a distribution business. We rapidly worked out that we wanted to control risk and generate performance for clients, so we morphed into a distribution business with captive investment management capability. As part of the next evolution, we want part of that captive investment management capability to be not captive.”   

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

• Topics
• Greater China
• LPs
• Fund-of-funds
• Technology
• Financials
• CreditEase
• ROC Partners
• RMB fund
• China
• Singapore
• Financial Services