Primary market investments – that is, unlisted projects, such as initial public offerings – offer more opportunities than the secondary market, says Andy Lin, chief executive of China Universal. The firm, with Rmb170 billion in AUM, of which Rmb80 billion is in mutual funds, set up an segregated account (SA) subsidiary, China Universal Capital (CUC) last March to allow it to make such investments.
“Our research and fund managers closely work with enterprises,” he tells AsianInvestor. “Then business owners often tell us about interesting business opportunities, such as potential mergers and acquisitions or investment in non-listed projects. We have already established experienced research team in different sectors; we think we can leverage our research expertise to examine these projects.”
Moreover, the resumption of mainland IPO activity in January is providing more opportunities for primary market investment, adds Lin.
CUC, set up last March and having accumulated Rmb30 billion in assets, is particularly interested in healthcare. It has set up a subsidiary to focus on this sector, covering private equity, venture capital, advisory and consulting businesses.
The firm’s first primary market deal was the purchase of a Rmb2.25 billion stake in real estate company Greenland as one of five investors putting in Rmb11.7 billion.
China Universal is thought to be the first mutual fund house to make a primary market investment after the China Securities Regulatory Commission in November 2012 allowed such firms to do so via a segregated account (SA) subsidiary.
However, there are concerns that the capital requirement of Rmb20 million is not sufficient to cover the loss for investors if a project defaults.
When asked about such risks to the SA subsidiary, Lin says: “Although segregated account subsidiaries engage follow the same investment horizon as trust products, an SA subsidiary’s business is different.”
Unlike trust and wealth management products (WMPs), SA subsidiaries do not provide a guaranteed return rate. “There is very clear risk disclosure in the contract, and investors understand they have to bear the investment risk.”
Nevertheless, Lin says it would not a bad thing for a trust product or WMP default to happen in China, where investors put too much emphasis on return, without enough consideration of risk. Default is a lesson that Chinese investors have to learn for the market to mature, he adds.
“A small-scale default in the bond market is likely to happen in one or two years,” says Lin. Investors should change their view towards investment products, he argues.
WMPs in China rarely ever default. For example, a Rmb3 billion WMP issued by China Credit Trust and distributed by Industrial and Commercial Bank of China – with a coal mine as the underlying – avoided default before it was due to mature on January 31. Investors were told they could sell their rights in the products to an unnamed buyer and would receive their principal but not interest.
Meanwhile, China Universal’s Hong Kong office is looking to expand from its current 20, particularly in investment and sales.