LP interview: Hywin Holdings

China’s Hywin Holdings sees itself as an anomaly in the wealth management and asset management space, in part because it is a business model purist. The firm eschews comparisons with diversified financial institutions and organisations tied to conglomerates, which it sees as less capital efficient.

Nick Xiao (pictured), vice president in charge of overseas business and CEO of the Hong Kong subsidiary Hywin International, pegs UK-based St. James’s Place as perhaps the closest analogue. Hywin aspires to be client-driven and portfolio-driven, creating its own funds and selling exposure to global managers. Revenue primarily comes from distributing external private-market fund products.

“Most managers with banking or broker roots are just moving to private markets in a gingerly, gradual manner, sometimes for countercyclical asset allocation, sometimes for slightly sticky recurring income,” Xiao said. “Hywin is different because private market alternatives are our staple. They’re the foundation of the business.”

Hywin was founded in 2006 and listed on NASDAQ in March 2021, claiming to be China’s third-largest third-party wealth management provider, with a 7.5% market share as of 2019. Wealth management accounted for 98% of its USD 277m in revenue for the 12 months ended June 2021. Other business lines include asset management and insurance brokerage. Net profit was USD 31.4m.

Xiao joined the firm in 2019, having previously filled roles at Credit Suisse and Julius Baer, as well as having served as head of priority banking for Standard Chartered Bank China while still in his 20s.

During the three years ended June 2021, Hywin’s wealth management division distributed products worth CNY 203bn (USD 30.2bn). More than 85% on this was private markets, chiefly real estate-backed products that offer fixed income-style returns.

The private equity and venture capital total was CNY 3bn. The firm receives distribution commissions of 2.3-2.7% on these products, plus performance-based fees of 5-50%. As of June 2021, only 20 products had generated performance fees. In the six months ended December 2021, wealth management distribution reached CNY 37.5bn, with the PE and VC share rising 295.5% year-on-year.

The demand is coming from 134,600 high net worth individual (HNWI) clients in Greater China, who are increasingly looking for long-term offshore exposure. That number – estimated to be about 5% of China’s total HWNI population – represents a 12.5% increase on 2020.

Demand patterns

HNWIs with wealth up to about USD 5m represent the bulk of Hywin’s underlying investors. Cheque sizes at the individual level are typically around USD 500,000 versus USD 20m for fund-level tickets.

For the ultra-high net worth segment (those with assets of more than USD 30m), Hywin can play the role of the family office, setting up Cayman Islands-administered structures and making allocations on a discretionary or advisory basis. This falls under the asset management services division, which had CNY 3.27bn under management as of December 2021.

“The mass affluent tend to be narrative-driven. They want certainty in an uncertain world, so they appreciate and follow well curated and explained strategies,” Xiao said.

“Ultra-high net worth individuals are truly agnostic, very humble and very fact driven. They can be extremely charming over a cocktail and talk about 100 different trends, but when it comes to their own money, they’re extremely scientific and take emotion out of it.”

There is significant exposure to Chinese managers, including Hony Capital, CDH Investments, China Renaissance, GGV Capital, and Hillhouse Capital. But Hywin emphasises its global credentials, including bases in London and New York and LP relationships with the likes of Schroders, Oaktree Capital Management, and The Carlyle Group.

“We now have conversations with private equity fund managers that traditionally only take money from sovereign wealth funds and insurance companies,” Xiao observed of the industrywide shift toward HNWI capital. “Rolls-Royce has been coming to see us recently – previously, it was only Mercedes-Benz.”

Hywin doesn’t disclose currency-level details, but Xiao confirmed renminbi-denominated funds make up the lion’s share of the private equity business. He observes that clients in this space are becoming more strategic and agile, targeting sectors based on policy initiatives, as well as monitoring funding rounds and secondary block transactions to judge trends.

“They are also conscious of the interplay between capital markets in mainland China, Hong Kong, and the US, anticipating that the coming home of China listcos will create opportunities. Also, clients are anxious to learn, and embrace frontier topics in chip-making, quantum computing, pharma, and bio sciences with an analytical mind,” Xiao said.

“And they now drive harder bargains. From management fees to carry, from direct investment rights to tagalongs, clients know they can extract more value from GPs. A 20 basis-point concession can grow into a substantive difference after compounding for 10 years – clients appreciate that acutely.”

The idea that global GPs are increasingly interested in exposure to this capital base has coincided with Hywin reaching deeper into the retail end of the HNWI spectrum. The firm’s participation in the so-called democratisation of private equity has also placed it more clearly in direct competition with technology platforms like iCapital Network.

Xiao observes that technology will indeed revolutionise private equity and venture capital in terms of execution, subscription processes, and post-investment monitoring. But he adds that human judgement is sometimes the last line of defence against miss-selling.

“The convenience afforded by technology platforms should never lead to private equity products being sold to people who do not understand them and who cannot live with the long-term and illiquid nature of such an investment,” he said.

“There is demand for the down-segmentation of private equity, but suitability is the key word. Whatever medium we use, suitability will come back to bite any financial services firm if they do not fully enforce and uphold the best standards in KYC [know-your-customer] and fiduciary duties.”

High touch

Xiao declined to comment on the idea of blockchain-based tokenisation bringing liquidity to traditionally illiquid assets, instead advising general caution whenever new layers of complexity are introduced. The conservatism gels with Hywin’s traditional operational profile, including a massive, 2,000-strong staff, 1,500 of whom are relationship managers, spread across 170 physical locations.

The firm hosted 117,000 existing and prospective clients at 6,363 marketing events during the three years through June 2021. It also organises conferences – at which experts share their views on macro and market trends, government policy, and asset allocation strategies – and collaborates with chambers of commerce, luxury brands, and university alumni associations on promotional activities.

“Technology does not always make for better transparency. If a technology platform completely digitises client onboarding without any human interface, its insights into the client tend to be poorer,” Xiao said. “We need to know about the client’s wealth history, risk sophistication, business and family situation in the classic, Swiss way.”

There is clearly something to be said for taking an old-school approach to this market, with net revenue per relationship manager reaching CNY 1.2m for the 12 months ended June 2021, up from CNY 850,000 a year earlier.

While the bulk of income is associated with external funds, Hywin also manages several branded private equity funds as a GP, notably including the Hywin Global Health Care Fund. Assets under management in this business amounted to CNY 3.3bn as of end-2021, up 74% year-on-year.

The GP-LP duality speaks volumes about the balance of diversification and specialisation in Hywin’s organisational identity. The firm prides itself on having an undivided wealth management focus against a field of diversified peers. But a flexible, open architecture approach to product customisation is the key to much of its confidence, especially in the current global malaise.

“We are acutely conscious of the macro situation, but we are not worried about it because our business model is hedged against anything. We are onshore and offshore, public and private, discretionary and advisory, manufacturer and distributor,” Xiao said.

“Funds are generally bullish by definition. We build clients’ fortresses, while also planning their raids and excursions. We have the best funds to capture every major trend, but we also offer private banking accounts – wrapping proven DPM [discretionary portfolio management] strategies – which have been associated with security in a turbulent world since the Napoleonic wars.”

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• Topics
• Greater China
• LPs
• Fundraising
• China
• HNWIs