Outbound fund-of-funds: China's white space

CreditEase started life in 2006 as a bricks-and-mortar operation that linked individual lenders to small-scale borrowers, typically the rural poor, salary workers and urban micro-entrepreneurs. The Chinese company expanded quickly. The peer-to-peer (P2P) lending platform went online and was then carved out into an offshore entity that last year listed on the New York Stock Exchange. Meanwhile, the overall product portfolio grew to encompass a range of consultancy services, including wealth management.

What CreditEase has managed to do is leverage its network of lenders and create distribution channels for a variety of financial products and services. And this wider array of options has in turn attracted investors in greater numbers. The strategy is not unlike that of Noah Holdings. Once the go-to placement agent for domestic private equity firms that wanted to raise capital from high net worth individuals (HNWIs), Noah is now an established player in asset management through its Gopher unit.

CreditEase also has a financial products distribution business - receiving a commission on each sale - but its significance as part of the overall operation is decreasing. The company's key growth areas are now funds, fund partnering, and direct vehicles that target areas in which CreditEase has domain expertise, such as financial technology.

On the funds side, an existing portfolio of domestic fund-of-funds products is increasingly complemented by an international offering: offshore fund-of-funds are already active in real estate and private equity, while a private equity secondaries vehicle is being raised. Fund partnerships include a tie-up with ROC Partners. CreditEase is responsible for fundraising, while the ROC team makes primary and secondary private equity investments, and seeks co-investments, in the renminbi funds space.

The general objective is to serve as a conduit for domestic capital that wants to access high-quality managers - at home and overseas - but in normal circumstances cannot. Noah has already trodden this path. When HNWI clients started developing an appetite for offshore private equity several years ago, the company funneled flagship global funds into its placement business; now the plan is to offer international products via Gopher so an offshore fund might go into the distribution network or into a fund-of-funds.

It is difficult to quantify the scale of this opportunity. The latest installment of the Capgemini and RBC Wealth Management's Asia Pacific wealth report puts the number of HNWIs in China - defined as those with at least $1 million in investable assets, excluding items such as primary residence - at 890,000 in 2014, nearly double the figure from five years earlier. The aggregate net worth of this group has expanded at a similar rate, reaching $4.5 trillion in 2014.

A survey that appears alongside the same report found that China's HNWIs had approximately 13.4% of their assets deployed in alternatives, while just over one third of their wealth - across all asset classes - was held outside of their home market.

It remains to be seen how readily HNWIs embrace private equity when it comes in a Noah or Gopher wrapper. On one hand, entrepreneurs plowed capital into renminbi-denominated funds during the boom years of 2010-2011 and many ended up disappointed, having misjudged the opportunity - or even the nature and structure of the asset class - or having been mis-sold products. On the other, they might be willing to return if offered exposure to global managers by a credible intermediary.

Fund-of-funds emerged in developed markets because of an information asymmetry: investors needed a conduit to lead the decision-making process and were willing to pay a fee for this service. As the asset class has become increasingly mainstream, information is more readily available; the asymmetry is no longer as stark and investors believe they can make decisions themselves.

China is at the foot of this evolutionary curve, at least in terms of international private equity, which suggests there is still substantial roadway for the fund-of-funds model. It is a white space that CreditEase and Noah are only too eager to fill, although they are unlikely to be alone in this endeavor.

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• Topics
• Greater China
• Fund-of-funds
• Fundraising
• China
• Noah Holdings
• CreditEase