Michael Felman, president of family office MSF Capital Advisors, has been doing business in Asia for many years. His family has invested in companies and projects in mainland China, Hong Kong, Korea and Singapore.

“My own family have started businesses in China and Korea and we are pretty active in Asia – all direct, private equity and real estate investments,” Felman told AsianInvestor, sitting in his office in midtown Manhattan. “We were early investors in private equity fund manager Cathay Capital. Everything else is direct and we own a lot of real estate in Beijing and Shanghai.”

That must be a concern is some ways, as there are still expectations that real estate in China will be depressed for some time. “The Chinese have tried to put restrictions on, and that’s very hard,” said Felman. “The market is suffering because the government is trying to curtail the price rises.”

Like most family investors, Felman began by investing in real estate, but also made angel investments in film projects and technology companies. Over the years, he has also been active in education and environment-related investments. 

From his New York office Felman steers his own and his clients’ money to suitable homes, in mostly direct investments. The nature of his activities now is in directing capital at environmental projects in emerging markets, including Africa and Latin America. MSF is also looking closely at Malaysia, with a view to bringing in co-investors from the Middle East to support its growing Islamic finance market. 

“Typically, the way it works for us is we have a local family as the lead investor,” Felman explained. “For example, we co-invested in a waste-water treatment company in China and we will bring in the expertise from our family or our associates to help expand the operation. Another of our co-investors in China right now is only focused on three types of asset: clean air, clean water and clean food.” 

He noted that healthcare is the other big macro opportunity in China. 

CULTURAL NETWORK

MSF does so via cross-cultural network of connections that Felman built up over 20 years of investing in the region. 

One of Felman’s family associates in Hong Kong is an Indian family, where the patriarch is one of the few foreigner operators licensed to drill natural gas in China. 

“He’s been doing this for 40 years. That kind of relationship gives us a unique perspective on China and that applies equally to the Middle East, Latin America and Europe.”

Felman sees his role nowadays as “strategy and execution: I go deep and narrow in search of sectors and we keep trying to figure out the best way to invest. Is it direct, is it a fund or a co-investment?” 

For Felman, it’s all about investment into China and he sees as much opportunity now as there ever was, despite the trade tensions. 

“There is a greater effort being made to attract capital into China. For US investors, it’s not easy to do that in the current environment, but if you have the right sectors, there is still opportunity to attract foreign capital, despite the tariff and trade wars.”

Felman’s role also leads him to advising Asian investors on their US holdings. “Asians really like hard assets; they want to come to New York, see a building and say ‘I own that’. Typically they use next to no leverage when they buy real estate. Then what they do is, after a year or two when they’ve seen some capital appreciation, they’ll refinance and use that extra capital it make another investment.”

He noted that family investors are quite comfortable with investing directly, and is critical of private banks that lack the network or the ability to match these investors’ expectations. 

“All the private banks are trying to do is put them into some kind of wealth management programme investing in the money markets. But they’d rather invest in something they can touch and feel. I don’t think that will ever change. Maybe by the fourth generation it will.”

TAX APPEAL

The increasingly liberal nature of tax rules in the US – with favourable rules on beneficial ownership disclosure and some US states even becoming tax havens – has only strengthened the appeal for Asian investors. This and the continued support of state-owned banks to facilitate outward capital flows boosts Chinese buying even in the face of the current trade war.

However, that interest has – tier one cities like New York aside – reversed when it comes to US real estate. A recent (May) report from commercial real estate specialist Cushman & Wakefield noted a “frenzy of disposal activity” among Chinese real estate investors in the US. 

According to the New York Times, Chinese investors are also showing less appetite for residential real estate. Research released by the US National Association of Realtors found that purchases of homes by Chinese buyers declined by 56% in the year to March 2019.

For US investors in China, the situation is perhaps even more problematic, especially with the prolonged nature of the trade dispute. Felman admits that not all of his investor partners are bullish on China. 

“Some of our US family clients wouldn’t touch China with a 10-foot pole because of the trade war,” he noted. “It has definitely affected the Chinese economy, and with that many people there are no small bumps in the road. I think a lot of investors do want to invest in China, but at this point they are being very cautious.”

This article originally featured in the Autumn 2019 edition of AsianInvestor magazine.