Hony Capital set to enter Chinese mutual fund industry

Private equity firm Hony Capital plans to establish a mutual fund company in China, according to regulatory filings.

The move by Hony Capital - owned by computer maker Lenovo’s parent company Legend Holdings - has been seen as a bid to capitalise on what private investors view as huge growth potential in the Chinese mutual fund segment.

The China Securities Regulatory Commission (CSRC) accepted Hony Capital’s application for a mutual fund company licence on August 14, while the whole approval process is expected to take about six months.

The planned firm (translated as Hony Yuanfang Fund Management) will be 99.9% funded by Hony Tongren Consulting (Tianjin).

The PE manager’s move has highlighted the trend of private managers entering the mutual fund business. It comes after Hillhouse Capital, another institutional Chinese private manager, teamed up with Tencent to apply for a mutual fund company licence in late June.

The CSRC’s market deregulation in mid-2013, which allowed securities brokers, insurers and private asset managers to enter the mutual fund industry, started this trend. Shenzhen Capital Group and Beijing-based JD Capital were the first two PE firms to set up mutual fund units – Hotland Innovation Asset Management and JT Asset Management, respectively – over the last year.

China’s private securities fund companies – the mainland equivalent of hedge funds – also plan to set up mutual fund units. Shanghai-based VStone has considered such a move but has not yet applied for a licence.

“This is not a new thing in China’s PE/venture capital industry,” said Wan Ge, analyst at Beijing-based consultancy China Venture, pointing out that other firms have tried to move away from a pure PE business model.

“Only large PE/VC firms have their human and capital resources to develop mutual fund units. They may not have a clear goal in the mutual fund industry, but [I think] they see the value and opportunity of a mutual fund licence amid deregulation.

“They may want to build multi platforms in the future, and PE/VC business may not be the single revenue source in the future, although they gained their foundation through PE business.”

January Sun, associate at Shanghai-based consultancy Z-Ben Advisors, said that “private fund managers may see limitations in expanding their wealthy client base, particularly after the success of Yu'EBao demonstrated the potential of the mass retail market.” Yu'EBao is the enormously popular money market fund established by e-commerce giant Alibaba and Tianhong Asset Management in 2013.

Sun noted that many mutual fund companies have been expanding into the alternatives business.

Hony Capital currently manages seven PE funds, with investors including China’s National Social Security Fund, China Life Insurance, Singapore’s Temasek, and Canada Pension Plan Investment Board.

Hony Capital did not respond to AsianInvestor’s enquiries by press time.