Private equity chases rich Chinese trying to escape market chaos
FROM a posh Hong Kong office on a Saturday (Oct 30), a group of 20 ultra-wealthy investors dialled into a call with Carlyle Group’s head of private wealth management for Asia.
Mostly Chinese, each had earmarked at least US$10 million for alternative investments, and they were there to assess the potential benefits of putting their money into Carlyle’s private equity funds.
The meeting reflects the confluence of two trends that are reshaping the private equity landscape in Asia. On the one hand, wealthy Chinese are exploring bigger investments in private assets as they seek shelter from wild swings in public markets. On the other, firms like Carlyle and KKR & Co are increasingly courting rich individuals amid a slowdown in allocations to the region from some of the world’s largest institutional investors.
“China’s wealthy are very interested in increasing their asset allocation to PE investments, partly to stay away from choppy secondary markets,” said Nick Xiao, the Hong Kong-based chief executive of wealth management firm Hywin International, which helped arrange the meeting between its clients and Carlyle. Meanwhile, for private equity firms, “with global institutional asset owners recalibrating exposure to this region, it’s becoming extremely important for them to seek out money from high net worth individuals”.
Oaktree and Schroders are also managing money for Hywin’s clients, while CDH and Hony Capital have worked with the multi-family office on fundraising, according to Xiao.
Schroders and Hony didn’t respond to requests for comment for the story, while CDH and Carlyle declined to comment. Oaktree didn’t immediately provide a comment.
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Earlier this year, the Texas public education employees’ pension fund said it would halve its exposure to Chinese stocks, showing how some institutional investors are getting more cautious on the region. China’s stock indices have dropped this year amid stringent Covid lockdowns and a property slump in the nation. They’ve seen sharp selloffs again in recent days after President Xi Jinping stacked the ranks of the country’s leadership with his allies.
Institutional investors often have mandates that dictate the ratio of private versus public assets. That means many can’t take on non-public investments after their publicly traded stocks and bonds shrink in value. It poses a growing challenge for private equity firms to raise money, pushing them to turn to deep-pocketed individuals who collectively provide a bigger pool of money to draw from.
Globally, the wealthy have the potential to play a larger role than institutions. High-net-worth assets could reach US$120 trillion by 2025, nearly double the size of pension funds, based on estimates from PricewaterhouseCoopers.
China is particularly important because it had the second-highest number of ultra high net worth individuals with wealth of at least US$50 million in 2021, behind only the US, according to a report by Credit Suisse. The number of such people in China is projected to grow from 32,710 in 2021 to 60,000 by 2026, about the same as the whole of Europe.
“Individual wealthy filling the gap of institutional investors in PEs is a global trend,” said LH Koh, Asia-Pacific co-head of global family and institutional wealth at UBS Global Wealth Management. “It’s pronounced in Asia because the growth in Asian wealth is higher.”
For Asian, and especially Chinese high-net-worth clients the opportunity to invest in private equity businesses holds added interest because it provides a rare glimpse into a once elusive world.
“It’s still a novelty for high-net-worth individuals to get access to KKR’s funds, which used to be predominantly open to only institutional investors, sovereign wealth funds and pensions,” said Markus Egloff, head of Asia private wealth at KKR, referring to the Asia region. Private wealth accounts for 10-20 per cent of KKR’s annual fundraising globally, and it could grow to 30-50 per cent over coming years, he said.
The push to win over wealthy Chinese remains a newer strategy for many funds. For some of the big global funds “they’ve gotten so large that they’ve capped out all of the institutional capital available to allocate alternatives”, said Philip Hu, managing director of Primavera Capital Group, which manages US$20 billion of assets. “So what happens next is you get into high-net-worth.”
Still, a private equity strategy is not always a sure bet for the wealthy. The cost of debt used to finance large buyouts has surged as rates creep higher. Unlisted assets are also rarely valued - a process known as “marking to market” - which can make them appear artificially attractive. Many investors have been burned by bets on Chinese technology startups, especially in fintech and education sectors, following a shift in policies. Given the long-term commitment of funding, wealthy individuals could be sacrificing liquidity for returns.
Morgan Stanley forecasts that the private capital market is set to grow at a 12 per cent annual rate to US$17 trillion of assets under management in the next five years. Still, the broker added that “it’s less clear whether in a meaningful higher interest rate environment, investors will continue to sacrifice liquidity for excess return”.
SoftBank Group founder Masayoshi Son’s Vision Fund is a prime example of how bets in private markets can sour. His firm booked a record 3.2 trillion yen (S$30.5 billion) loss in the three months that ended June, mainly due to markdowns after the estimated values of companies in its investment portfolio dropped.
Some firms like UBS encourage their high-net-worth clients to take a portfolio approach when backing PE funds.
That way, when funds start paying returns from year six or seven, they turn into cash flow as a form of return for investors, said Koh. “The strategy is to invest at a portfolio of funds, taking an endowment-style approach.” BLOOMBERG
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