How has CreditEase developed from a P2P platform to a wealth management business backing global private equity and venture capital firms?
Cally Liao: Our business has developed mainly in response to the needs of our clients. We have over 100,000 wealth management clients and most of them changed their mindsets to increase their asset allocation to alternative investments. Chinese investors used to over-allocate to fixed income and real estate because the market was dominated by money managers who offered these types of investment products.
Seungha Ku: Over the years, CreditEase has built up its investment and asset allocation capabilities in alternatives. We are a market leader in China in terms of providing alternative solutions to investors. Chinese investors used to have very limited access to this asset class for two reasons: state-owned enterprises are not properly set up to offer alternative products and there’s still a limited number of experienced private wealth managers.
What’s driving the change in mindset?
CL: One is the significant increase in the investable amount in Chinese households. Another is the lower returns in fixed income coupled with the uncertainty in the domestic real estate market. Third, in the past few years, clients have seen the increased volatility in the capital markets and realised that it would be very difficult to put all their assets in one basket or for them to manage their assets themselves. Lastly, there’s also been a huge increase in individual assets.
Where are you finding the best investment opportunities?
SK: Outside China we mainly focus on North America and are selective in Asia and Europe especially post-Brexit vote and with the uncertainty of certain markets there. The US accounts for more than 50 percent of our global private equity fund of funds, while the balance is a mix of Asia and Europe. We are interested in pan-regional funds in Asia because these vehicles can capture key markets like China and Indonesia. As for Europe, we find developed economies such as the UK, Germany and the Nordic region provide promising investment opportunities.
We think there are a lot of great companies, especially in the mid-market segment where valuations and leverage ratios remain more reasonable compared with large-cap transactions.
What’s your view on the private credit and NPL markets?
SK: We are thinking of preparing a private credit vehicle. As you know, banks are cleaning up their balance sheets as a result of regulation tightening in the US as per the Volcker Rule, which has created a huge missed opportunity. We plan to focus on funds that lend to strong businesses that have positive cashflow but are unable to access bank lending. We see interesting opportunities in Europe and the US.
Despite the volatilities, Europe presents compelling private debt opportunities as the companies in the region have historically relied heavily on bank loans compared with their US counterparts which have access to banks as well as the capital market for financing.
On the distressed and NPL market, we are a lot more cautious. We are in a credit boom cycle now so banks are tightening their lending and similarly financial institutions are lending less and less. When the economy is slowing down, there might be a lot more opportunities and deals in this space as a result of companies failing to refinance their debt packages. We are more cautious about distressed opportunities globally. That is not our focus right now.
What do you look for in fund managers?
SK: We look at the team dynamic among partners. We also look at their investment strategy to see if it makes sense in the next three to five years. We check their track record – both good and bad deals – as well as the industry and partners they selected. We also zoom into their investment process: is it an institutionalised platform or a one-man shop? Lastly, we monitor closely our existing funds through regular and ad-hoc meetings/calls and conferences.