LPs see decoupling as bigger issue than delisting - AVCJ Forum

Edward J. Grefenstette, president, CEO and CIO of The Dietrich Foundation, which 90% of its $1.1 billion of assets in private markets and about one-third of that in China, described the State Department’s call for university endowments to divest their interests in US-listed Chinese companies as “eye-catching” but not a huge risk factor for US investors. He noted that many of the companies that might be subject to delisting saw their stock prices rise following the intervention.

Rather, Grefenstette is more interested in the “dual circulation” strategy first promulgated by President Xi Jinping in May. The government later elaborated that China would rely on domestic production, distribution, and consumption to support its development, with innovation and industrial upgrades underpinning growth. It is seen as reflecting a strategy desire to lessen dependence on overseas markets and technology.

“As fiduciaries we have to understand better what a dual circulation strategy might mean for LPs and spend more time thinking about portfolio construction from that perspective, not worrying about Chinese companies being forced to delist in the US,” said Grefenstette.

Tianhao Wu, director of investments at Rockefeller University, also played down the significance of delisting, which it tied to a longstanding dispute between China and the US Public Company Accounting Oversight Board (PCAOB) over the inability to conduct local audits of Chinese businesses. Wu noted that the mainland and Hong Kong bourses offer better trading multiples for Chinese companies than US exchanges, while regulatory reforms are making it easier to list.

“When they went IPO in early years the business models were copied from the US, so US investors were more familiar with the business models. Companies chose the US because investors were more sophisticated,” Wu said. “Now we see a loosening of listing requirements and more innovative business models coming out of China and an increasing sophistication among local investors. Chinese companies do not need NASDAQ to list.”

Rockefeller University, which has approximately $2 billion in endowment assets, altered its investment strategy for Asia in 2015-2016 on concluding that it was underinvested in the region. The China allocation has risen from 2% to 10% across public and private markets; private markets account for 2% of the 10%.

Several LPs noted that they are seeing strong distributions from their China portfolios as buoyant public markets have facilitated profitable sell-downs in companies that listed in recent years. They expect more to come, given the steady flow of new IPOs in 2020.

From a longer-term perspective, China’s transition from technology copycat to genuine innovator is reason to build up early and growth-stage exposure. Sherry Lin, head of global venture and Asia at Willett Advisors, a family office for Michael Bloomberg, recalled a conversation with a US manager who is now focused on importing Chinese business models to the US “because they are innovating faster than we are,” especially in areas such as the monetization of social and mobile traffic.

While Willett Advisors is taking a wait-and-see approach to US-China tensions, Lin observed that decoupling – and potentially more protectionism and innovation in isolation – could lead to increased opportunities for LPs targeting China.

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

• Topics
• Greater China
• LPs
• IPO
• Technology
• Regulation
• China
• TMT
• USA
• The Dietrich Foundation
• Rockefeller University
• Willett Advisors
• AVCJ Events