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Private capital investors in China demand more data, more often

30 April 2021

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Private Capital LPs are demanding more data and insights on cybersecurity, ESG and portfolio performance as reporting requirements rapidly rise. James Donnan, Regional Managing Director, Asia-Pacific, and Fang Ling Khor, Head of Fund Services, North Asia, discussed this – and more – at a recent HKVCA webinar.

Investors in China’s private capital sector increasingly want data on cybersecurity, Environmental, Social, and Corporate Governance (ESG) and portfolio performance. And demand for this data in China looks likely to outstrip that from much of the rest of the world.

Regional experts discussed the changing data landscape at a recent webinar that Intertrust Group sponsored, hosted by the Hong Kong Venture Capital and Private Capital Association (HKVCA), Private Capital in China: Evolving investor requirements on data transparency.

Speaking at the event, James Donnan, our Regional Managing Director, Asia-Pacific, outlined what data and fund reporting investors (otherwise known as Limited Partners or LPs) are likely to require from chief financial officers (CFOs) in future. Discussions were based on our recent survey of 300 CFOs of global private capital funds conducted between December 2020 and February 2021. Almost a fifth of respondents were CFOs of China-focused funds. Most funds surveyed had more than US$1bn assets under management, and the majority of those in China focused on private equity.

The survey found that demand for data in China is predicted to overtake that from the US and Europe in the next ten years. Some 80% of CFOs in China expect investors to require daily or live updates on portfolio performance (42% and 38% respectively). This compares with 70% in the US, 67% in the UK and 63% in Western Europe.

Donnan said this will have a “profound effect” on CFO teams in China who will need external help.

“This is going to lead to more investment in technology and an increasing trend towards outsourcing,” he predicted.

Fang Ling Khor, Intertrust Group’s Head of Fund Services, North Asia, explained her analysis of the survey findings for China’s CFOs and investors. “Real-time data helps with acquisitions and risk management,” she said. She also noted that increasing regulatory and compliance requirements have created a need for more timely and greater data transparency.

The number of smartphone users in China – higher than in any other country and set to grow with the population – is also likely to drive data demand as it will enable engagement with more frequent reports. “It is quite natural for Chinese CFOs to have higher expectations in terms of data transparency compared to their peers in other countries,” she said.

How has Covid-19 affected reporting expectations?

Panellists agreed that the Covid-19 pandemic has brought a need for more frequent updates, particularly as current travel restrictions make face-to-face meetings and information exchange difficult.

However, Cliff Chau, Partner, Hopu Investments, emphasised that frequency of data is not investors’ only concern. “Our business is about communication – it’s about having more live conversations with our investors, even in the form of virtual meetings,” he said. Building relationships and trust is key.

PV Wang, Managing Director, Legend Capital, pointed out that LPs needed to let their general partners (GPs) get on with their core job – creating value and returns – particularly as the investments tend to be illiquid.

Certain LPs tend to require more frequent updates, as well as specific detailed portfolio information to meet regulatory requirements. The situation was exasperated during the initial period of the Covid-19 outbreak, as regulators were learning to navigate unchartered territory. That was especially evident among some Chinese institutional LPs.

Meanwhile, Marcos Chow, Head of Technology Enablement at KPMG, outlined the value of self-service portals that can enable real-time access to data, as well as providing tools to extract and transform the data as required. While customised requests from LPs can be challenging, he added, technology such as intelligent automation and artificial intelligence could prove invaluable.

Meeting the cybersecurity threat

Another technology-related issue putting increased demand on reporting and data requests is cybersecurity. Panellists cited the increasing frequency of cyber breaches. The more we rely on the internet, the higher the risks, and the survey found that in the next decade, 58% of CFOs in China will expect live or daily updates on cybersecurity. This compares with 70% for the US, and for the UK and Western Europe, 56% and 50% respectively.

“It only takes an LP to experience one cyber breach to be really alarmed and to start hiring outside consultants, advisers, and roll out the whole suite of counter cybersecurity measures,” added Legend Capital’s PV.

Marcos from KPMG added that the use of trusted and reputable cloud providers can help to minimise these threats.

ESG: China’s new data demand

While ESG concerns are growing in China, the frequency of related reporting remains lower than in other regions, Donnan said. The survey found that only 40% of CFOs in China expect live or daily updates on ESG compared with 64% in the US.

This is not down to lack of interest, according to Cliff from Hopu Investments – ESG is a hot topic in China. Rather, he suggested, the lower response is down to difficulty defining ESG reporting standards.

All panellists agreed that the challenges of 2020 have highlighted the need for “access anytime, anywhere”. Whether it is data on cyber risks, ESG or other reputational risks, in an increasingly digital world the need for more frequent, high-quality reporting is growing – and not just for financial performance. Increasingly, today’s investors in China look beyond the numbers.

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