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Investors drawn to China’s private capital market

17 August 2021

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Asset management in China is thriving despite the pandemic, with international fund managers eying returns from the swift recovery, say Fang Ling Khor, Head of Fund Services in North Asia and Ivy Yang, Senior Manager, Business Development in China.

Asset management in China enjoyed a breakout year in 2020 despite Covid-19 and volatile markets. Total assets under management flourished last year, growing by 12% to US$9.2trn, according to publishing and research specialists The Asset.

This is no surprise to us. The wider Asia Pacific region offers reasonably good returns, so remains highly attractive to foreign investment managers wanting to enter the market either directly or through a fund. In 2020, the entire region reported $185bn in deal value – the highest since 2016 – right in the middle of the pandemic.

Private equity deal value booms in China

Whatever happens more widely in Asia is clearly mirrored in China. Greater China recorded $97bn worth of private equity deal value in 2020, according to consultants Bain & Company – roughly half the value achieved in the entire region, up 42% from 2019 and 22% higher than the previous five-year average.

This shows the promise in the Chinese private equity market and how it continues to attract international fund managers when compared with other regions, such as Europe, which are still struggling to contain the pandemic.

The strength of China’s manufacturing sector underpins its economic resilience. The first country hit by the pandemic, it was also the first to tackle the crisis effectively and set its domestic economy on the path to recovery. This was helped by global demand for masks, protective equipment and medical devices, products, where no other country comes near China’s manufacturing capacity.

Demand for consumer products such as food and beverages, as well as high-tech and digital products and services – semiconductors, e-commerce, digital payments and online entertainment – have also lifted the economy and the local stock market. As soon as the country’s general partners (GPs) were able to resume work on closing deals put on hold as the country went into lockdown, foreign capital began flowing in.

Dry-powder capital will drive deal activity in China

Despite continuing international travel restrictions and lingering caution among limited partners (LPs), a significant amount of “dry powder” – capital committed to funds that hasn’t yet been invested – is available to GPs in China.

The next six to 18 months are likely to be very busy for private fund deal activity, thanks to that record amount of dry powder, along with growing domestic demand as the macroeconomic climate becomes more favourable.

The Chinese government has also increasingly focused on sustainable growth, a policy likely to shake up the economy as well as investment perspectives. As a result, environmental investing is ready for a bumper year since international fund managers increasingly view this asset class as a key-value driver.

The authorities also recently intervened to regulate education and training. Although some investors retreated in response, the fundamentals remain positive and the market is increasingly open to foreign capital. The regulatory scrutiny has been linked to the government’s aims of sustainable development, affordable education and boosting the birth rate.

Asset management in China: a complex market

Many top-tier foreign asset managers have already invested successfully in China with the help of local GPs or partners. We expect mid-tier players to follow suit. However, foreign GPs should be aware that doing business in China is quite different from doing business in the West – in terms of language, culture and negotiating skills.

Having the right partner on the investment side and finding the right service provider is crucial, especially when it comes to bridging the gap between East and West. China is a very complex market after all.

Despite many centrally-driven and nationwide policies and rules, the country’s size means doing business even in neighbouring cities and provinces can be very different. Preferential treaties for particular industries and synergy created by business clusters can vary widely, for instance.

This means that operational considerations such as careful location planning prior to launching a fund are important considerations for GPs, alongside successful fundraising and investment sourcing.

For example, the popular Qualified Foreign Limited Partnership (QFLP) programme has differing requirements for funds (and fund managers), on registered capital, management qualification of GPs, investable products and more in the cities of Beijing, Shanghai, Shenzhen and Hainan

Finding the right service provider in China

The role of local service providers is to work with foreign partners and explain the complexity of the Chinese market.

With 20 years of experience in mainland China, Intertrust Group understands local rules, culture and customs as well as how they are evolving and how they affect cross-border investments and business activities.

Our advice to potential private fund GPs and investors in China is to prepare thoroughly, just as they would with any other new market where they might venture. It is important to acknowledge that the market in China may be quite different to what they are accustomed to in the US or the UK.

How Intertrust Group can help in China

  • Entities formation
  • Accounting and reporting
  • Tax compliance filings
  • Global treasury management
  • Entities corporate governance services
  • Executive compensation and payroll administration