As Chinese markets mature the quality and scope of fund service providers becomes a key focus.
Private capital assets under management (AUM) in Asia Pacific (APAC) will reach $2.25 trillion by 2026 at a compound annual growth rate of 15% according to Preqin. Private equity and venture capital will make up the lion’s share of that total.
Within APAC, China’s rapid growth as a destination for private capital is well documented. The country is now the most popular destination for private equity investment in Asia.
That brings opportunities—and challenges. The relative freshness of China’s private capital sector means regulations are not well-known and specialist expertise can be hard to find.
Against this backdrop, fund managers are reevaluating their need for fund service providers in China. Some are even switching their fund administrator mid-cycle.
As the Chinese alternative sector becomes more sophisticated, managers find that basic, cut-price services no longer provide the support they need.
The evolution of Chinese markets
China’s rapid rise in private equity and other alternative assets is a relatively recent phenomenon. The sector remains behind Europe, the U.S., and some other Asian markets, but it’s catching up.
The government is keen to encourage private capital investment, and an influx of foreign funds is bringing more expertise and increased fund operations expectations to the Chinese market.
At the same time, local general partners (GPs) are experimenting with more complex strategies as they launch follow-on funds. Noting this, regulators are starting to demand greater levels of transparency and investor protection. This is all happening against the background of a highly cost-conscious industry.
Traditionally, local managers have not outsourced middle- and back-office functions, preferring to keep operations and costs in-house. That attitude has been reinforced by the relatively low cost of labor.
However, as funds grow, regulatory requirements increase and strategies evolve, in-house operations and fund administration are becoming more complex and costly.
Funds need specialized expertise, along with a broader range of administration services. Small in-house teams that struggle to meet these new demands are a potential brake on growth.
Fund services are evolving
More fund managers are considering outsourcing fund services and operations and finding that the third-party service sector is still evolving.
That evolution is accelerating, thanks to the relocation of specialists from other jurisdictions, and pressure from foreign GPs looking for the breadth and depth of services they’re used to elsewhere.
The result is that service providers in China are starting to specialize in the unique demands of private equity and other closed-end funds.
Fund managers, however, need to research the market well before choosing a provider. Price competition in China is fierce, and low prices may come with their own costs.
Private equity requires specialist knowledge: Regulations, custodian banks, and more
New entrants to the Chinese private equity market need specialist services and local knowledge.
They often struggle to navigate evolving regulatory requirements and the complexity of fund operations. For example, all fund-related transactions in China require a custodian bank, which creates a large amount of paperwork. Government and local agency filings also impose additional administrative obligations.
In addition, overseas funds investing in the Chinese market have data-hungry investors to satisfy. Presently, foreign limited partners tend to be more demanding concerning reporting and transparency. But local businesses advertising fund services don’t always seem to be geared up to meet those demands. Many are purely corporate accountants sensing a new opportunity.
With administrative pressures increasing, many GPs, both local and international, are looking beyond price to the breadth and scope of third-party services, and the experience of the teams delivering them.
Choosing a fund services provider in China
The uniqueness of private equity funds and their investments mean that sector expertise is paramount. Generalist corporate service providers aren’t sufficient.
Foreign managers often arrive with experience of one-stop-shop fund services from other jurisdictions. Using the same provider in multiple jurisdictions provides consistency and reduces complexity.
And as strategies evolve and regulation tightens, both foreign and local private equity funds are seeing the need for a partnership approach to outsourcing fund services.
Specialist global providers are best placed to meet that need. This is the next evolution of fund services in China.
- CSC completed its acquisition of Intertrust Group in November 2022. Together we offer a global solution for subsidiary governance, fund strategies, and capital markets transactions, with tools to help fund managers navigate the ever-changing compliance and regulatory environment that they face. With capabilities in more than 140 jurisdictions, we are able to do business wherever our clients are—and we accomplish that by employing experts in every business we serve.
- As a strategic partner, our proprietary innovative technologies are combined with global knowledge and experience to deliver added-value services catering for all asset classes, while increasing manager visibility of portfolios on behalf of a fund’s investors.
- Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations, and portfolio management.
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