Chinese asset manager Harvest has started raising capital for a private equity fund investing in Shanghai property.
The fundraising has highlighted the firm’s move to diversify its business by building an alternatives investment capability via its segregated account (SA) subsidiary company.
Harvest Capital, Beijing-based Harvest Fund Management’s SA subsidiary, last year formed a partnership with developer Shanghai City Property to set up a company - Shenzhen City Harvest Investment Management – which specialises in real estate investments.
The joint venture acquired the World Trade Tower in Shanghai from Morgan Stanley in early August.
In July, Harvest Capital started fundraising with a target of Rmb1.19 billion ($186 million), which will be used to pay for the acquisition. The private equity fund will be sold as an SA product targeting high-net-worth individuals. Investors will become shareholders in the Shanghai property asset and returns will be generated from the building’s rental income and asset price appreciation.
The five-year product will have three possible exits - Harvest Capital can sell the whole building, sell the office units separately, or list the property as a real estate investment trust (Reit).
Zhao Xuejun, Harvest Fund Management’s president, said the firm planned to expand its investment capabilities beyond the traditional secondary market, and will target various assets regardless of whether they are listed or non-listed companies.
Although many SA subsidiaries have introduced segregated products backed by property assets, Harvest’s new PE fund will rarely require the manager’s asset management capabilities.
Shanghai-based consultancy Z-Ben Advisors has estimated that around 70% of mainland China’s SA subsidiaries generate revenue from “channel business”, where the firms act as a middleman in arranging debt or loan financing between lenders and corporate borrowers. Such products provide a high-yield return to investors, and have also become part of China’s shadow banking system in supporting companies’ debt financing.
Harvest has been diversifying its business model since 2011 when it set up an alternative investments subsidiary, which now comes under the firm’s global business unit. It established Harvest Capital in 2012 to sell SA products to wealthy Chinese individuals.
Harvest had a total AUM of Rmb589.9 billion at the end of June 2015, with Rmb282.7 billion and Rmb103.3 billion coming from its mutual funds business and Harvest Capital respectively, according to the Asset Management Association of China (Amac).
In all, 77 out 97 mainland Chinese fund companies have SA subsidiaries, and had a total of Rmb6.12 trillion in AUM as of the end of June this year.