Regional Managing Director, Asia PacificView bio
Regional Managing Director, Asia Pacific
James is the Regional Managing Director of Intertrust Group in Asia Pacific with over 400 specialists across 10 offices offering corporate, fund, capital market and private wealth services to multinationals, fund managers, financial institutions and business entrepreneurs worldwide.
James joined Intertrust Group in 2015 as a member of the Management Team in Hong Kong and China. In addition to managing the Hong Kong office, he has been the Head of Fund Services responsible for the delivery of services to Intertrust Group’s alternative investment fund clients across Hong Kong and China and was also responsible for leading the Group’s Private Equity strategy across Greater China.
Prior to joining Intertrust Group, James spent over ten years at KPMG in Hong Kong/China and Australia, his last position was a Director in the Financial Services division.Close
China offers immense opportunities to any investor, thanks to its fast-growing economy supported by favourable demographics and a buoyant consumer base.
For private capital investors there is an added advantage in that upcoming millennials, like their peers elsewhere in the world, are refraining from taking control of their family-owned companies in order to pursue other careers. This is creating a new wave of opportunities for GPs to acquire private companies, modernise them and take them to the next level in this exciting market full of growth opportunities.
But as information becomes ever more important in today’s world, private capital funds, which have a traditional tendency towards confidentiality because of the nature of the deals they conduct, are coming under increasing pressure to become more transparent. This pressure is primarily coming from their investors or limited partners (LPs), who not only want more transparency on where and how their capital is allocated for their own purposes, but also for regulatory reporting requirements. This trend is only increasing as larger, more heavily regulated LPs – such as financial institutions, sovereign wealth funds and pension funds – seek to increase their exposure to private capital funds in China.
To understand more about these growing pressures, Intertrust Group conducted research* with Global Custodian to ask the chief financial officers (CFOs) at private capital funds what they are seeing at the cutting edge of the industry.
GPs anticipate increasing demands for more disclosure
The research shows that CFOs at Chinese private capital funds expect their LPs to require data updates with increasing frequency over the next decade.
The strongest demand is for portfolio performance updates, with 80% of the CFOs expecting their LPs to be looking for access to live or daily updates. This is significantly higher than their peers globally, of whom 64% say this.
While China’s private capital market can generate superior returns, this emerging market is also perceived to be more complicated with a higher degree of risk associated with that return. As such, investors expect insights to be as detailed as possible. This trend accelerated during the pandemic, with LPs generally wanting even more informed insights on the underlying investments in their funds and all the inherent risks.
The information they require is more than just fund performance returns: many private capital funds are illiquid and thus it is typically impractical to provide fund valuations any more frequently than on a monthly or quarterly cycle. Rather, investors expect dynamic information on metrics such as debt levels, any financial instruments being used such as hedging, FX fluctuations – as well as portfolio company data such as daily sales, customer volumes and working capital.
LPs are also looking for more transparent data on other non-financial metrics at a portfolio level, such as customer trends, reputational risks and – increasingly – environmental, social and corporate governance (ESG) risks. GPs must be focused more than ever on giving LPs reassurance. This is only good investor relations at a time when they are seeing opportunities on the horizon and they are competing for capital commitments.
Strong demand for SLA data
The second strongest anticipated demand is for operational service level agreements (SLAs), with 71% of CFOs expecting their investors to be looking for access to live or daily updates. Again, this is significantly higher than CFOs worldwide, of whom 50% say this.
The reasons for this demand are very much the same as for portfolio updates. LPs want to know straight away of any SLA breaches, such as legal, security or increasingly important regulatory infringements. Regulators also want access to data on where an investor’s funds are allocated, and this needs to be available on a real-time basis.
Cybersecurity is a critical area that is increasingly front of mind for CFOs because of the data security sensitivities of investors and their regulators. Concern about this among our CFOs in China is the same as globally, with 58% of the former saying they expect LPs to demand live or daily updates versus 57% worldwide.
While ESG is a relatively new concept across Asia, it is emerging fast. The pandemic has heightened investors’ sense of social responsibility and they are increasingly challenging GPs on it. However, whereas 40% of CFOs in China expect LPs to demand live or daily ESG updates, the figure is higher at 51% among CFOs globally.
Nearly one in four will outsource
How GPs respond to the increasing demands of LPs for more detailed and timely updates will be a major factor in their competitiveness. They will want to maintain cost efficiency but still deliver the services their investors require.
The three most popular solutions, according to our survey, are to invest in technology, which was cited by 24%, followed by increasing the size of the in-house finance team (24%), and 23% saying they will outsource more functionality. 19% were aiming to invest in distributed ledger functionality while 10% say they will retain the existing balance between in-house and outsourcing.
GPs must meet investors’ demands
Those GPs who are unable or unwilling to address investors’ requirements for information will not be successful in the intense competition for capital to invest into China.
This will require substantial investment: our own estimate for what will be needed globally is US$5.5 billion.
Setting up the required functionality is an option, especially for those GPs that wish to retain complete control. But this can be costly and divert CFOs’ attention away from their primary functions of raising and deploying capital. Furthermore, LPs increasingly expect independent oversight and governance over their invested funds.
Alternatively, private capital funds can outsource these functions to an independent services provider. This gives them access to the right people and systems with economies of scale. It means they can deliver industry standards of service incorporating the latest technology.
To achieve this, they should partner with a services provider that has many years’ experience in China, understands the complexities of both the domestic and international markets and can serve them across the whole value chain.
*Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021, including 54 in China