Global PE firms need to tailor RMB fund offerings for Chinese investors: Augentius CEO

Photographer: Nelson Ching/Bloomberg

As China remains an intriguing yet lucrative geography for global investors eyeing opportunities and designing ways to make an entry, a global private equity and real estate administrator’s top executive has a suggestion for managers setting up RMB funds: Do not assume Chinese investors will behave the same way, and have the same expectations, as their Western counterparts.

“Although the market is rapidly maturing and will likely, in time, ‘Westernise’, this is not quite the case yet. A successful entry into the RMB market must involve more than a ‘cookie cutter’ approach – instead, managers should tailor their offering to the Chinese market and be willing to do things slightly differently,” Ian Kelly, CEO at Augentius told DEALSTREETASIA in an interaction recently.

While many heavyweights in the asset management and alternative investment space globally like BlackRock, Fidelity and UBS have recently jumped on the opportunity to have RMB denominated funds, a lot of players who previously only dealt in USD-denominated funds are also getting involved, he said.

The recent shift may have also been an effect of China’s recently introduced capital controls. “Thanks to this there is now a large pool of money in the domestic market that simply has nowhere else to go, as well as a swathe of promising domestic businesses that are off-limits to foreign-denominated investment,” Kelly noted.

Formed in 2002, London-headquartered Augentius claims to be one of the leading Private Equity and Real Estate administrators which administers 520 funds on behalf of 198 clients. Kelly, who sits in London, has been with the firm for over a decade.

Edited Excerpts:

As a Private Equity Fund Administrator, have you seen a smart trend emerging out of PE firms in Asia Pacific in terms of strategy for fund formations. Anything that has emerged out of particularly China and Southeast Asia that you may want to point out?

It is quite a generalised phenomenon as it is about China opening up as a whole. However, China’s start-up tech boom is certainly of key interest to a lot of managers.

We are seeing fund managers taking up RMB denominated funds. How does that play out. Is that a trend that is seen also among non-China fund managers who are allocating an RMB denominated portion as we recently saw in a regional VC fund that closed. What is the reason for this strategy and does that pose any challenge in future?

Yes, this trend can definitely be seen with non-Chinese managers. For instance, BlackRock, Fidelity and UBS are just some of the big Western names that have recently jumped on this opportunity, and we are also seeing that a lot of players who previously only dealt in USD-denominated funds are getting involved.

There are regulatory drivers behind this, namely China’s recently introduced new capital controls, designed to limit outward direct investment and encourage usage of the RMB both domestically and abroad (offset by further measures designed to boost foreign investment by relaxing various rules). Thanks to this there is now a large pool of money in the domestic market that simply has nowhere else to go, as well as a swathe of promising domestic businesses that are off-limits to foreign-denominated investment.

However, while the new capital controls are an immediate catalyst, this was always going to happen eventually once the Chinese market started opening up to foreign players. Whereas the previous market for RMB funds was largely limited to HNW and UHNW individuals, China’s institutional investors – insurance companies and so on – are now growing and developing to the point where they are comfortable investing with private equity funds, opening up a whole new market segment.

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How has the interest from LPs and other investors progressed for funds based in Asia Pacific or rather raised with a focus to deploy in the region? Does it remain as attractive as it used to be for investors outside of the region?

It is becoming more attractive as the Chinese market matures and investors feel more confident. Everyone knows there’s a lot of future potential growth to be taken advantage of in the region. And the new capital controls in China mean there is a huge swathe of promising companies off-limits to foreign currency-denominated investment.

China is playing a major role when it comes to investments in the region– in PE, VC or other strategic investments. How do you think that changes the play-field for Asia or non-Asia PE investors. Does that also change the equation between LPs and GPs in terms of expectations from a vehicle?

There are key considerations for managers looking to set up new RMB funds. The foremost danger to avoid is assuming that domestic Chinese investors will behave the same way, and have the same expectations, as their Western counterparts that you are more used to.

Although the market is rapidly maturing and will likely, in time, ‘Westernise’, this is not quite the case yet. A successful entry into the RMB market must involve more than a ‘cookie cutter’ approach – instead, managers should tailor their offering to the idiosyncrasies of the Chinese market and be willing to do things slightly differently.

What is your expectation of deal flow in the region — China, Southeast Asia and India. With dry powder globally at an all-time high, are there enough deals in the region to deploy that huge capital. Further, is valuation a concern in this region?

Domestic institutions have now evolved to the point where they are using private equity (which in China had previously been more or less limited to HNW and UHNW investors). While this will certainly boost the market in the long-run, in the short-term it does mean that a large pool of capital has suddenly come into play domestically, which is having an adverse effect on asset prices.

In Real Estate, for instance, many of the more savvy GPs offshore that serve sophisticated international LPs are having a tough time deploying capital as a result. However, this will smooth out over the mid-to-long term.

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