Value Partners targets China private funds market

The firm is striving to build out its wholly foreign-owned enterprise on the mainland and seeking regulatory permission to become a registered private fund management company.
Value Partners targets China private funds market

Hong Kong’s Value Partners is seeking to build out its wholly foreign-owned enterprise (WFOE) in China, in line with other foreign fund managers in the country.

The firm established its WFOE – Shanghai Value Partners Management Consulting – in 2011 in Pudong, Shanghai. The unit houses research and investment staff providing independent advisory to domestic investors and private banks, including on qualified domestic institutional investor (QDII) product.

“We are launching an initial public offering with Bank of China’s private bank for a QDII fund that will fit into our Hong Kong authorised funds,” said Albert Teoh, the company's head of corporate development.

But the firm’s goal is to expand by offering private funds through its WFOE. As such, last year it registered to become a special member of the Asset Management Association of China (Amac), a self-regulatory body representing the domestic funds industry.

It is understood that Amac has not completed the ordinary member registration process for WFOEs yet, as it needs more time to study – alongside the China Securities Regulatory Commission (CSRC) – the potential impact of foreign asset managers using WFOEs to enter the domestic private funds market.

“We are charting our footprint in China,” Teoh said. “We are seeing huge deregulation [in the mutual fund market] that has provided energy to the private funds sector. We are driving our WFOE in that space.”

China’s mutual funds industry had been stagnating, with industry AUM having increased just 9% since 2009 to stand at Rmb2.93 trillion ($477 billion) as at the end of last year, according to data from Shanghai-based consultancy Z-Ben Advisors (click on chart 1).

Dealing in authorised mutual funds was proving unsuccessful. Average industry management fees fell 9.3% since 2008 to the end of 2013, with compound annual growth rates having been negative for each of the past six years, by Z-Ben data (click on chart 2).

Managers blamed their limited investment scope in traditional asset classes – leading to product duplication and saturation. At the same time trust companies – which span private equity, asset/wealth management and banking – have been able to roll out services in response to market changes and had swollen in size collectively to $1.5 trillion by the end of last year.

As a result the CSRC introduced rule changes in September 2012 to permit mutual fund companies to run subsidiaries that could manage a wider range of products, notably in private markets.

Value Partners’ own joint venture – Value Partners Goldstate Fund Management, in which it has a minority 49% stake – set up a segregated account subsidiary in February 2013, taking a 65.5% stake. A Shanghai advisory firm holds 34.5%.

But Teoh noted that once its WFOE gains permission to enter private fund markets from Amac, it would be able to do virtually everything its joint venture could do in the secondary market, bar launching authorised funds.

Asked whether Value Partners might eventually withdraw from its JV, given potential overlap, Teoh said it was not for him to comment.

“What I can say is that we are strengthening our WFOE’s capabilities and developing business opportunities to attract new clients and gain their trust,” he explained. “Foreign fund managers are moving in that direction [by setting up WFOEs]."

Foreign firms with a WFOE in China, excluding those for private equity, include Fullerton, Neuberger Berman, Hillhouse, APS, Baillie Gifford, Och-Ziff, Canyon, Oaktree, Citadel, Man and BNP Paribas, according to Z-Ben Advisors.

The subsidiary unit of Value Partners’ China JV, Shanghai Goldstate Brilliance, saw one of its projects became embroiled in a third-party fund misappropriation investigation last month, as reported. It resulted in subsequent interest default of these plans.

Legal proceedings in relation to the alleged misappropriation are ongoing. A spokeswoman from Value Partners declined to comment on the case.

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