How US family offices pinpoint Asian investments
US family offices are increasingly keen to put more money to work in Asia's relatively robust economies. But while opportunities exist aplenty, finding and then taking advantage of them is another matter.
Different family office heads have adopted varying strategies to do so. Michael Felman of New York-based MSF Capital Advisors said he typically looks to regional partners, as they know more than he will.
“Typically, we have a local family as the lead investor. For example, we co-invested in a waste water treatment company and we will bring in the expertise from our family or our associates to help expand the operation. Another of our co-investors in China right now is only focused on three types of asset: clean air, clean water and clean food.”
The need for good regional affiliates was echoed by Rich Nuzum, president of the wealth division at Mercer in New York. He noted that US family office and sovereign investors “tend to be sophisticated in doing alternatives and doing direct, co-investments and partnering with GPs, so that all comes together in some interesting China plays”.
The theory is that US family investors can partner with regional specialists, and if they do so early enough and are correct in their assessments they can lock in a long-term strategic gain.
“If you’re early into Chinese corporate bonds, for example, which are now more accessible, then other investors decide that makes sense, or the indices decide to include them, you get a one-time gain, because other money came in behind you,” said Nuzum.
Meanwhile, Michael Zeuner, managing partner of New York-based advisory firm WE Family Office has a preference for secondaries as a way of getting diversification and to shorten the J-curve.
“Whether that is secondary real estate or secondary private equity, for the last several years secondaries have been an important part of our portfolio,” he said.
More broadly in global private equity, Zeuner believes there are still some early stage venture opportunities with reasonable valuations, along with middle market buyouts, where his company sees good companies with solid cashflows and opportunities for improvements. This stands in contrast to larger cap buyouts, where he believes a lot of financial engineering is taking place to create value.
TRADE WAR WORRIES
While the overall interest in Asia is strong, most US investors told AsianInvestor they have concerns over the ongoing US trade war with China.
It’s a sensible concern, believes a New York-based private wealth adviser at a large Wall Street bank.
“We have been saying for some time that the trade war is a risk that the market seems to be not factoring in, to the extent that it really should be,” he told AsianInvestor. “It could lead to a great deal more volatility.”
That bleak view was similar to the one held by Jimmy Chang, chief investment strategist for Rockefeller Capital, which manages the wealth of the seven-generation Rockefeller family.
“In the US, there’s bipartisan support for getting tough on China, which is viewed as a strategic competitor to the US, so this goes beyond trade. It is about potential technological dominance in five to 10 years from now, the military positioning on the South China Sea, Taiwan and what’s happening in Hong Kong now,” he told AsianInvestor.
“Trump doesn’t want to tank the economy and the market here for his re-election [in November 2020]. At the same time China is facing a lot of pressure, with some western companies exiting or reducing production and supply chain out of China.”
That should theoretically raise the incentives on both sides to strike a deal, but Chang believes tensions could continue for many more months.
“Trump needs to win Mid-West battle ground states, and trade is a huge issue there; protectionism is very popular. So unless he can extract a lot of concessions from China, he probably won’t make a deal. He’ll drag this thing out.”
Similarly, Felman admits that currently “some of our families wouldn’t touch China with a 10-foot pole, because of the trade war. It has definitely affected the Chinese economy. And with that many people in China, there are no small bumps in the road.
“I think a lot of investors do want to invest in China, but at this point they are being very cautious,” he added.
Meanwhile, US investors are also aware of the risks in Hong Kong, as mass protests continue to take place on a weekly basis.
“If China sends in the troops to quell the protests, that would trigger retaliatory measures from the West and raises questions about what happens to Hong Kong’s special status under ‘one country, two systems’, and as the financial centre in Asia,” said Chang.
LONG VS. SHORT VIEWS
Despite the noise surrounding Hong Kong, Felman believes the China investing market will continue to grow.
“In terms of bringing investment into China, I’m seeing more capital and opportunity right now, despite the tariff and trade wars,” he said. “The Chinese market is huge and it’s not going away. They are getting older and they want cleaner water, cleaner air.”
Mercer’s Nuzum reckons the short term volatility is just noise to most sophisticated family investors in the US, who focus more on the horizon.
“If the stakeholders have signed off on a long term programme, it takes seven years to get diversification in a private asset class exposure. It takes a long time to find the GPs (general partners) you want to work with.”
However, those bullish perspectives contrast with the view expressed by another family investor, who wanted to remain anonymous. Some investors are starting to realise the growth potential in China is not necessarily what they’ve been led to believe, which leaves some of the valuations on some Chinese businesses looking far too high.
“Is a Chinese company really worth six times the equivalent company in the US? That is what we are being asked to believe currently,” said Nurzum.
For all the long-term bullishness of US wealthy families about Asia and China in particular, the current geopolitical uncertainties may conspire to slow down how quickly US family offices can build the regional contacts they need to invest, and indeed their willingness to come at all.
One family office director told AsianInvestor he intends to visit China in the fourth quarter “if things improve in Hong Kong – otherwise I’m not going.”
This article was adapted from a feature on US family wealth offices that originally appeared in AsianInvestor Summer 2019 edition.