Private Equity Funds and Fund of Funds in China, also known as ‘Sunshine Funds’, are growing rapidly. In this guest post, my colleague and Managing Partner of Harneys Shanghai Kristy Calvert explores the reasons behind this trend.
The Asset Management Industry is one of the fastest growing business sectors in China. Privately managed (non-retail) funds in China, often referred to as ‘sunshine funds’ by local practitioners, have traditionally enjoyed a largely unregulated environment – unlike the mutual funds industry, which is heavily regulated by the Chinese Securities Regulatory Commission (CSRC).
The Asset Management Association of China (AMAC) was established on 6 June 2012 as a self-regulated organization. AMAC is staffed by former employees of CSRC and aim to promote a better regulated wealth management sector in China.
AMAC has a voluntary registration mechanism on its website in China. Given the voluntary nature and relative ease of registration on the AMAC site, more and more onshore private fund managers have used the association as a tool to promote their fund publicly and add to their credibility. Since AMAC’s inception date, I have taken a keen interest in the registration database and been a regular site visitor. I have often been taken by surprise by the amount of managers being added daily from what was a virtually non-existent database in 2012.
AMAC reports that by the end of January 2016, there were 25,841 registered private fund managers and 25,461 registered private funds; and subscription scale reached approximately US$826 billion while contribution scale amounted to approximately US$663 billion.
Source: AMAC. Divided by total subscription scale of running funds, there’re 292 funds between 2 billion to 5 billion yuan, 114 funds between 5 billion to 10 billion yuan and 88 funds over 10 billion yuan.
As the private funds industry in China is starting to mature, we are also seeing more Fund of Funds (“FOF”) emerging in the market. Chinese securities companies are the pioneers leading this new development in China. It has been reported that CITIC Securities, the largest securities company in China, has already invested RMB 1.5 billion in about 60 private funds since 2010, alongside other key players in the market such as China Merchant Securities.
The growth of this local asset management industry has coincided with the growth of high net worth individuals in China. In recent years, due to the application of various investment controls by the Chinese government to cool down the local property market, many wealthy Chinese have turned to alternative investments. Private fund managers commonly access their investor pool through private bankers and wealth managers in China, as well as using family and friend networks.
Local fund associations have also been formed in recent years, with support from local district governments. These provide educational and support forums for these private managers to interact with each other and professional service providers in the industry to better structure both onshore and offshore funds. Many private fund managers have run very successful local funds with impressive returns year on year to their Chinese investors.
Given the existing success achieved by the local teams, we are seeing a trend of more and more of these managers establishing US dollar funds offshore – often domiciled in the Cayman Islands. Over the past four years, while living in Shanghai and working with these fund managers, I have helped some of these well-known local brands to launch their first-ever offshore funds. These offshore funds have leveraged off their existing reputation, performance, and investor base while becoming more international and establishing more robust track records, as well as providing diversification and growth for their investors’ non-China assets.
We are excited to be part of this growing and innovative industry in China as it matures and seeks to showcase its investment talents on the international stage.