UBS Global Asset Management has set up an alternative-investments unit in Beijing to meet the surging demand for hedge-fund and private-equity exposure from institutions and high-net-worth individuals (HNWIs) in China.
The local entity will enable UBS to provide onshore alternative products to domestic investors and offer investment-management and advisory services in areas such as the set-up of private-equity funds, direct PE investments and funds of funds.
Ling Xinyuan, China chairman at UBS Global Asset Management, says surging demand in alternative investments in China was the catalyst for creating the company, which primarily serves institutional investors, such as pension funds and insurance companies, and wealthy individuals.
For example, the total capital committed to China's PE market stood at $652 billion as of June 30 and demand is growing particularly fast among domestic HNWIs and family offices, according to Zero2IPO, a Beijing-based consultancy.
However, UBS plans to take a different approach than most to private equity.
China’s PE market tends to focus on pre-IPO equity investments, notes Ling. When excessive money chases a limited supply of pre-IPO targets, the entry price multiples go up, but the risks also increase.
“There is a mismatch of resources in China at the moment," he adds. "Too much short-term money goes into long-term projects, while long-term institutional investors do not find enough long-term investment products."
As a result, says Ling, UBS's new alternatives unit will provide investment products with lower risks and more stable yields for long-term investors with a horizon of 10 years or more.
The prospective product offerings relate to real estate and infrastructure projects and funds of PE funds, he notes, but pre-IPO projects will not be the main targets.
UBS has a long track of record in managing PE FOFs in Europe and North America, adds Ling, and in the past few years the firm has helped offshore investors pick good onshore PE funds.
The new unit completes UBS’s asset-management offering in China, where joint-venture fund manager UBS SDIC and UBS Securities already make traditional investments in listed securities.
China’s institutional investors, such as sovereign wealth funds, have been increasingly active in the alternatives arena in recent years.
China Investment Corporation says in its 2010 annual report, released last week, that it has increased its allocation to alternative investments such as PE, real estate (Reits in particular), infrastructure and direct investment.
And the National Council for Social Security Fund (NCSSF) has also been tapping alternative assets such as social security housing. In July it confirmed it had lent Rmb4.5 billion to the municipality of Chongqing to build 37,400 units of social security housing. In June and February, it agreed to two similar projects, in Tianjin and Nanjing, each worth Rmb3 billion.