Value Partners making leap into China's private markets

Value Partners Group Ltd., a Hong Kong-listed money management boutique with close to $17 billion in assets under management, is moving to further diversify its long-standing focus on Greater China equities with a range of private markets capabilities.

The focus on new lockup-structure vehicles is being pursued, in part, to make the "once-in-a-lifetime" opportunity company executives say they're anticipating in coming years from China's integration into global investment portfolios a less volatile one for the firm.

Au King Lun, Value Partners' Hong Kong-based CEO since late 2016, said by early next year the firm will launch a 5 billion renminbi ($728 million) private equity fund focused on China's budding for-profit higher education sector and a $500 million private debt strategy.

Both strategies — with multiyear lockups — should offer attractive solutions for clients while helping alleviate the "huge mark-to-market risk" of Value Partners' more than $10 billion book of Greater China equities business, Mr. Au said in an Oct. 8 interview.

The private markets push underway now counts as a second round of diversification for the 25-year-old firm. After 15 years focused on Greater China equities, the firm began building a fixed-income business in 2009, led now by Gordon Ip. The Greater China High Yield Income Fund that Mr. Ip's team launched in 2012 has become a growth engine for the firm. Net inflows of $1.6 billion for the first half of 2018 made the fund — at $5.4 billion — Value Partners' biggest, lifting the fixed-income business to 35% of total AUM from 30% at the end of 2017.

Mr. Au said the experience Mr. Ip's team gleaned by investing a small portion of the income fund in private debt over the years laid the groundwork for the coming launch of Value Partners' first dedicated private debt strategy.

Meanwhile, Value Partners Private Equity Investment (Shenzhen) Ltd., a wholly foreign-owned enterprise the firm launched earlier this year, teamed up in July with China Education Group Holdings, the third-largest Hong Kong-listed education company by market capitalization, to manage the 5 billion renminbi fund.

Separately, Value Partners will follow up an initial real estate private equity fund the firm launched last year with a second fund early next year. Seed capital from the firm accounted for more than half of the first fund's $170 million in AUM, but the second will target "several hundred million dollars" in client money, he said.

While negligible at present, "we would like to have a significant part of our AUM coming from alternatives in five years' time," Mr. Au said.

If volatility has been a constant for China's markets over the past two decades, it was the Shanghai Stock Exchange's 150% surge over the year through June 2015 and subsequent plunge of more than 40% in the ensuing months that seemed to stiffen the firm's resolve to tweak its book of business.

Value Partners' annual report for the following year said that roller-coaster ride brought home the impact that a "market correction could have on our business. In this regard, we are resolute in diversifying our product suite to manage the inherent cyclical nature of our business."

The firm's stock price on the Hong Kong Stock Exchange this year — plunging, amid a rise in U.S.-China trade tensions, from an intraday high of more than HK$10 ($1.28) in January to a closing low of HK$5.20 in August — suggests there's still a lot of work to do in that regard. At the close of Hong Kong trading on Oct. 12, Value Partners shares were changing hands at HK$5.78.

Cheah Cheng Hye, Value Partners' co-founder, chairman and co-chief investment officer, speaking at the firm's Oct. 8 launch of a regional office in Kuala Lumpur, said the "feast or famine" nature of the money management business — marked by "years where you make so much money … and years where you just starve" — can't entirely be avoided.

Calendar year 2017 was a feast. The firm reported record net profits of HK$2 billion, up from HK$138 million the year before, record year-end AUM of $16.6 billion and record revenues of HK$4.1 billion, bolstered by performance fees of HK$2.6 billion. The company reports various financial figures in either U.S. or Hong Kong dollars.

The current year, with emerging markets stocks retreating around the globe — and Chinese stocks in particular wilting under the weight of U.S. President Donald Trump's protectionist ire — has been a famine, Mr. Cheah said.

Year-to-date through the close of trading on Oct. 12, the Shanghai Stock Exchange composite index is down 21.17%, while the Shenzhen composite, with more small- and midcap stocks sporting higher valuations, is off 31.75% — the steepest declines in Asia.

Still, for the six months ended June 30, Value Partners reported roughly $1.6 billion in net inflows, more than offsetting market-related losses and lifting AUM to a record $17.2 billion. With the continued retreat of emerging markets stocks in recent months, Value Partners' reported AUM dropped back to $16.6 billion by the end of August.

Some sell-side analysts contend Value Partners' shares offer an attractive mix of risks and rewards at current levels.

Jemmy S. Huang, a Taipei-based analyst with J.P. Morgan Securities (Asia Pacific) Ltd., in a mid-August report recommended investors overweight Value Partners stock, citing solid first-half inflows in a challenging market environment for the manager's high-yield fixed-income fund and China products, and the added prospect of its fledgling private equity business becoming "another growth driver." He declined to provide further comment.

While volatility remains a challenge, Mr. Au said the big picture when it comes to the opportunities Value Partners can pursue in coming years looks increasingly bright.

Recent moves by MSCI Inc. and FTSE Russell adding China to their global benchmark indexes has led to a "paradigm shift," Mr. Au said.

Sophisticated institutional investors are seeking managers for stand-alone allocations to China, as opposed to emerging markets managers with strong China capabilities, "several years ahead of our expectations," he said.

Value Partners "just recently won a major mandate" of several hundred million U.S. dollars, with room to grow much more, from a European institutional investor to invest in a mixed portfolio of mainland-listed A shares and Hong Kong-listed H shares, Mr. Au said. He declined to name the client.

He said Value Partners' decision to build its own brand on the mainland — exiting in 2015 a joint venture with a local firm it had forged in March 2012 — has worked out well.

Value Partners currently has three separate wholly foreign-owned entities on the mainland: the Shenzhen private equity WFOE; a Shanghai-based one with a qualified domestic limited partner license that allows Value Partners to sell overseas funds to qualified investors on the mainland; and another Shanghai-based WFOE with a private fund manager license, which allows Value Partner to manufacture local strategies for local high-net-worth and institutional investors.

Meanwhile, the firm is seeking approval to register two of its biggest Hong Kong-registered funds — the $1.3 billion Greater China equities-focused Value Partners Classic Fund and its $2.9 billion Value Partners High-Dividend Stocks Fund — for China's Mutual Recognition of Funds program, which would allow mainland retail investors to buy them.

Mr. Au said if Value Partners can garner approval for those funds, it will be in a position to double its AUM under the rules set by China's regulators, which limit the portion of a Hong Kong-registered fund's AUM that can come from mainland investors to 50%.

And with Value Partners having secured a private fund manager's license from the Asset Management Association of China just less than a year ago, roughly two years remain before the firm will be eligible to apply for a retail fund manager's license, under current rules, he said.

Mr. Au said Value Partners could find itself with "all engines firing" on the mainland in the not-too-distant future.

The firm currently manages $1.4 billion on behalf of mainland clients, up 30% from the end of 2017. While the amount remains a fraction of Value Partners' total book of business, some of the firm's latest wins — such as mandates from insurance companies or private banks on the mainland to manage domestic equities and bonds — are significant, Mr. Au said.

"We're now beginning to get traction," he said. "People are beginning to recognize our brand."