China's private funds face staff exodus, business scramble as rules bite

[SHANGHAI] China's private fund managers are facing an employee exodus and some are closing as Beijing's clampdown on leverage and financial risk claims more scalps.

Once a booming industry - capital grew by seven times in the three years to 2017 - fund managers have been caught in regulators' cross hairs for their role helping financial institutions side-step rules and risky dealings.

Repeated attacks by Chinese regulators on wealth management products last year slashed funds from banks flowing to private funds.

And in guidelines published in November, permitted leverage will be slashed to 200 per cent when some funds were using as much as 2,000 per cent. They will also be barred from offering implicit guarantees against losses.

The result, according to employees, head-hunters and analysts, was a rush for the exits.

"Some funds have even started selling their licences," said Du Yang, managing director at China Securities International.

"We expect more private funds to close up," Mr Du added.

The number of employees in fixed income leaving local private funds doubled last year compared to 2016, according to Kristina Liang, a senior recruitment consultant at Michael Page.

"Candidates used to hang up on me when the fixed income market was on the high, but now my line is busy with candidates calling me," said Ms Liang.

The fund industry in China includes asset managers who invest in private equity as well as public markets. Paid up capital grew from 1.49 trillion yuan (S$314.2 billion) at the end of 2014 to 11.1 trillion yuan last year.

"I'm expecting to do smaller deals this year, because of the new rules," said one person on the private equity side of Harvest Fund Management who requested anonymity because he is not permitted to speak to the media.

Harvest Fund Management could not be immediately reached for comment.

Assets at Yaozhi Asset Management, one of Shanghai's largest private funds, slumped 15 per cent last year, said Wang Ming, a partner at the firm.

Some analysts see the crackdown as a necessary move to clean up the industry.

The new regulations "will help create a long term sustainable industry, assuming they are enforced as conceived,"said John Ott, partner with Bain & Company and a leader with its Greater China financial services practice. He added that one executive client said "these are the most significant changes he has ever seen".

The China Banking Regulatory Commission did not respond to requests for comment. The Asset Management Association of China said private fund manager registrations and filings were normal, adding that there was 40 billion yuan worth of growth in the sector every week.

In December 2017, the private fund industry grew 200 billion yuan, an average of around 50 billion yuan a week.

Regulators have focused on asset managers because of their role in the shadow banking sector, where they helped financial institutions invest in risky areas otherwise blocked to them.

"There was a lot of sideways dealing in the industry. The new guidelines have definitely shut it down for now," said one person in a small fund in Shanghai who asked for anonymity because he is not permitted to speak to the media.

Banks could invest via private equity funds in property companies who guaranteed repayment, according to five private fund employees. The loan to the fund was not considered a property deal which, together with its assured repayment, reduced the money the bank had to set aside against the risk it was taking.

Another route involved lending to developers by investing in fixed income funds, which put the proceeds into developers'bonds.

Regulators had over the past year begun targeting these investments from the bank side, which was already hurting private fund managers' profits even before November's crackdown, forcing many to seek new sources of investment.

Employees at Ping An Asset Management, which has seen a drop in bank funds, are starting to target listed companies for money to manage, as well as high net worth individuals, according to one investment manager at the fund.

"There's a lot of pressure to build new business," said that person, who requested anonymity.

Ping An Asset Management could not be reached for comment.

Others are increasing efforts to gain regulatory approval for deals. At Minsheng Tong Hui Asset Management, whole teams must now sign off on deals or products submitted to the regulator, up from a single employee previously, said one person with direct knowledge.

Minsheng Tong Hui Asset Management could not be reached for comment.

Some fund are shutting up shop. Zhu Yun, a sales person at Jian Qiao, a Shanghai firm selling private fund licences, said two private funds closed in the second half, compared to none in the first.

Employees who are leaving are choosing to go to mutual funds and wholly foreign-owned enterprises, said Ms Liang.

"In the past, they used to drive a hard bargain on salary raises and bonus schemes: now they just say - are there any jobs?" Ms Liang added.

REUTERS