Next year could be an ideal time for Chinese investors to invest in private equity funds, including those offshore, with yields likely to compensate for the added exchange rate risk as liquidity conditions tighten onshore.
That's the view of the chief investment officer of ICBC-Axa, a joint venture between the world's biggest bank by assets, Industrial and Commercial Bank of China, and French insurer Axa.
Speaking at AsianInvestor's 5th China Global Investment Forum held in Beijing last week, Guo Jinlu said onshore private equity investment had suffered as a result of the new asset management rules introduced in April but for long-term investors there were likely to be buying opportunities up ahead.
“In the next year, [private equity] investments will drop to the ice point. Investors like us should take action when it’s the ice point … to obtain some very cheap assets,” he said in a panel discussion.
As a result of the revised asset-management rules, which were designed to reduce systemic risks inside China, a record number of private equity and hedge funds were dissolved in the first half of the year as it became harder to secure funding.
The Asset Management Association of China (Amac) — a government-controlled industry body — “lost contact” with 163 private fund institutions in the first six months of 2018, more than 70% of the total in all of 2017, the Financial Times reported on August 5. The “lost contact” designation in China refers to private funds that have failed to renew their three-monthly Amac registration status, as required.
Since then the unified rules for asset management products have been relaxed to help provide additional liquidity to the market as the wider economic uncertainties stemming from rising global trade tensions ratchet up.
Against this backdrop, the yuan is seen likely to be under pressure in the medium-term, creating a hurdle for investors in China intent on sniffing out assets offshore that they cannot find onshore.
But that's perhaps where private equity funds yielding between 10% and 15% can come in and more than compensate for the exchange rate risks, Guo said.
“Based on these considerations, my suggestion is [private equity] funds. Because overseas [private equity] funds have sophisticated experience and track records … Overseas PE funds are also good at investing in high-tech and new-economy companies,” he said.
However, persuading other Chinese investors to follow suit could be tough going, if a live poll conducted at the conference is any guide.
When asked which asset class they planned to increase their exposure most to in the next 12 months as part of their overseas allocations, 44% of respondents picked emerging market equities, versus 19% each in G3 fixed income and private equity.
“The problem about private equity is you’re going to get caught on capital ... just be aware that you should be matching the duration of risk (assets) to the duration of your liabilities,” said another panellist Steven Cohen, principal of CBM Investment Management, a Switzerland-based family office and wealth manager.
But then he too favours another alternative asset class — and a lumpy one at that.
The huge opportunity, especially in China, is infrastructure. Investments can be made in this area through private-public partnerships, Cohen said.
“If I was a longer-term investor, that’s what I’ll be — and I am — looking at. Those kinds of projects ... are very exciting,” he said.
Guo agreed on the added liquidity risks that can arise with private equity investments. He also cautioned against some fund structures where investors are required to continue injecting capital into private equity funds that are making losses.
But as Janice Hui, an investment consultant at Willis Towers Watson and another panellist, reminded the audience, the merits or otherwise of the asset class forms part of a bigger story: that of diversifying assets to maximise risk-adjusted returns.
It’s good that clients and asset owners get access to the private markets, private debt, or other alternatives, she said, because it can lower a portfolio's correlation metrics and improve returns.