Executives at Edinburgh-based Baillie Gifford, like many other money managers, recognize the need to have an on-the-ground presence in certain markets — namely, mainland China.
Last year, the firm registered as a private securities fund manager in China and opened an office in Shanghai. When news broke of its new office in September, the firm said it ran about £45 billion ($63.4 billion) in China equities, equating to about 17% of total AUM at the time, with the new office allowing it to invest in more Chinese companies and the new license permitting the launch of private strategies to Chinese investors.
But as of Dec. 31, only about 1% of total AUM was run on behalf of clients based in China including Hong Kong, up from 0.53% as of Dec. 31, 2019, according to Pensions & Investments' data.
"The China office was established in the first instance because we think there's a whole lot of very exciting companies being created in China, and although we're content with being here in Edinburgh … in the case with China we thought we needed to be closer, in particular to build relationships with academics (and) clients," said Stuart Dunbar, Edinburgh-based partner. "We thought we better go and start learning. I'm not even sure now it's a commercial venture ... it's a cost-of-investing-better" process.
The firm recently launched its first qualified domestic limited partner fund, which permits foreign money managers to raise money from China-based institutional and high-net-worth investors. The global equity strategy for domestic Chinese investors launched this year at $90 million. Partner John MacDougall relocated to Shanghai in September 2019 as chairman and chief strategy officer for China, and the firm has about 14 people there with an expectation of growing "modestly depending on progress," Mr. Dunbar said.
The firm's approach to its business in China stands out. Peter Alexander, founder and managing director at data analytics and advisory firm Z-Ben Advisors Ltd. in Shanghai, said the firm "came out swinging a couple years ago out of nowhere and announced it was increasing the registered capital of their investment to 500 million RMB — about $70 million," Mr. Alexander said. He said that figure, at the time, was "a huge line in the sand — (they were) really going to do some big things here." However, what the firm has done so far seems small, he said, with one qualified domestic limited partner product.
"Where I think they deserve credit" is the relocation of Mr. MacDougall to China. "We've always been big advocates of you want someone who knows the organization as well as knows the China market because there are some significant cultural differences between operating a local business here" in China and elsewhere.
Z-Ben's advice is usually to have a co-CEO role in China.
Baillie Gifford now faces two major obstacles in the market: first how they conduct business and not just bringing "tried and tested and true" business approaches that have worked in other markets and trying to "switch it on in China," Mr. Alexander said. "That typically will not work. We are in no way advocates of you have to do it the Chinese way — that also will not work. They are going to have to make certain amendments and be comfortable being uncomfortable in certain areas to compete locally."
The second complication is that organizations have launched private funds and ventures "even before the private fund market is open" in China. Firms have hired talent but platforms remain untouched. "Over the course of eight months, the better part of a year, I've had an increasing number of very talented, local people come to me, just abjectly frustrated. They didn't join the firm to spend 50% of their time educating people about China," Mr. Alexander said. Baillie Gifford will not be immune to this as far as he can see.
Whatever the firm's approach to China, the road will be rocky. "The China market is littered with people who fly too close to the sun — you need some significant humility and rhinoceros-like skin. If you don't have those two things, please don't come," Mr. Alexander said, although added that Baillie Gifford has "a lot going for them" in the market.