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Increased Interest from HNWI for Wealth Preservation Drives Evolution of Chinese Offshore Fund Vehicles

One of the more interesting aspects of being part of a global business is the opportunity to see macro- economic trends emerge and witness how they are shaped by the social and cultural values that drive them. Today, one of the most significant of these is the flow of domestic Chinese wealth to offshore investment structures.  The technical fundamentals of this alone are worth consideration, but the real intrigue lies in the desire for a reflection of the same cultural principles that govern the domestic business environment.

There has been a massive amount of wealth generated in China over recent years on the back of an economy that has seen unprecedented growth.   There is a desire to preserve that wealth by diversifying into global investment opportunities and escape the concerns of future lower domestic growth and potential currency devaluation.  Ultra-High-Net-Worth Individuals (UHNWI) are seeking opportunities to de-risk their portfolios, create succession planning solutions and participate in more regulated and global markets.

There is concern and uncertainty around traditional asset classes such as Chinese A shares and a potential insurance against this is to gain access to a wider choice of opportunities via the global markets and specifically via offshore investment vehicles. As a result , we have seen a significant increase in the number of Family Offices  created to facilitate these demands.   In many cases, these are the offshoots of large-scale domestic Chinese institutions that have specifically been set up to provide access to offshore vehicles for their UHNWI clients.  These individuals are, in many cases, large industrial tycoons who have amassed assets at home over the past 15  to 25 years.  They are seeking alternative solutions to preserve and increase that wealth.

The proximity of an established location like Hong Kong and its return to Chinese governance in 1997 was one of the catalysts for the progression towards the situation that we have today. Right on the Chinese doorstep was the ability to gain immediate access to a financial services centre perfectly suited to meet the demands of those who wished to venture into the global financial markets.  Since then, there has been a decentralization of this activity to locations such as Shanghai and Shenzhen, who are increasing  their sophistication and act as regional gateways from mainland China to the offshore world.

Therefore, the perfect environment was created for what we have seen evolve today.

This evolution of wealth generation and protection is something that we have seen before around the world, but what is unique in this situation, is how the values of the Chinese culture are impacting on the provision of services to this traditionally western offshore investment model. What we are seeing is the collision of two worlds that have arrived at this point from very different backgrounds.

Offshore jurisdictions such as the Cayman Islands offer established vehicles that have been used by Europe and the West for some time now. However, for a lot of Chinese firms and fund managers, this is their first foray into the offshore world.  In many cases, these managers  may be spinning out from large local institutions, either in total or as part of a Family Office mentioned previously.   As with many features of this trend, this has resonance with how the market operates outside of China, but whereas the emerging manager in the US or Europe will typically be familiar with how the offshore world operates and functions, it is not necessarily the case with their Chinese equivalent.

This presents a unique challenge and opportunity for all players.  There is a need to bridge the gap between the Chinese emerging asset manager’s  desire to embrace the offshore world and their relevant inexperience.  It is here where the differences between the cultural nuances and how they relate to the market environment are at their sharpest.  The service provider industry for the offshore world is a mature one that has been subject to decades of transformation and development.  It is highly competitive and the differentiation between the participants can be hard to appreciate for those unfamiliar with the market.

There is a long list of firms who have failed to ‘crack’ the Asian market.  Typically, a failure to appreciate local custom and business decorum is cited as a major reason for this.  We know that business etiquette is not universally transferrable and in this instance it is most certainly the main challenge to be overcome.  There are some sophisticated attributes at play here.  We have an emerging market that is driven by a traditional economy which has experienced rapid growth in recent times and is at the point of its development where it evolves to the offshore vehicle.  This market itself is a highly competitive and developed one, but it has to show patience and understanding to its newest participants.

The cultural background of these managers dictates that they seek a partnership and collaborative service provider. There is a process of education to be undertaken and it must be done in a certain manner and at a certain pace.  The decision-making process is longer, personal integrity is everything and respect between parties is paramount.  The familiarisation that exists  in a mature market, which allows for the rapid arrival at decision points, is not there.

As a global fund administrator that has been around for over 15-years, we have had a great deal of experience in working with clients in various regions with different cultures. We believe the trend in the evolution of Chinese offshore fund vehicles will continue  and in order to take advantage of the opportunities in the Asian UHNWI marketplace, service providers need to  attempt to bridge the gap in the understanding of the offshore world and the experience to date of the emerging asset manager in China.

 

by Mark Hedderman, CEO and Tony Kan, Managing Director

Custom House Global Fund Services