Initial demand stirs optimism for QDLP in China
The fundraising success of China’s first two foreign hedge fund products for domestic investors shows how the QDLP scheme can be a hit despite slow progress so far, say observers.
The Qualified Domestic Limited Partner (QDLP) pilot programme was launched in September last year to allow foreign hedge fund managers to raise RMB-denominated assets to invest internationally.
Six global managers were admitted to the pilot scheme, each with an individual quota of $50 million. They were Canyon Partners, Citadel Group, Man Group, Oaktree Capital, Och-Ziff and Winton Capital.
However, to date only two – Citadel and Canyon – have launched QDLP products in the public domain. Och Ziff is understood to be marketing a product privately via its sales force.
Despite the evident go-slow, the first two products have proved popular, with Citadel raising Rmb300 million ($49 million) this March to invest in the firm’s flagship Kensington global strategies fund. Canyon similarly raised Rmb300 million to invest in its value realisation fund.
“Appetite from Chinese high-net-worth individuals for QDLP products is high,” noted Ivan Shi, a manager at Shanghai-based consultancy Z-Ben Advisors.
Buying momentum for the two products has been strong enough that both firms are understood to be preparing to apply for a second batch of quotas.
Further, it is widely expected that the four other pilot scheme participants will announce they have filled their quotas this quarter, and that a second batch of QDLP players will be announced to include private equity and real estate investment, also potentially this quarter.
Shih suggested that the information disclosure of QDLP products was appealing in comparison with trust products, which have been criticised for investing in spurious projects in some cases. He also pointed to state backing for China’s growing band of HNWIs to diversify internationally and into new products, fuelling his optimism for the QDLP scheme.
Matthew Wong, a China tax specialist at PwC, said that the programme’s slow development so far may be due to problems with distribution, given that these managers have all launched new products, which are harder to get off the ground initially.
The market speculation is that Citadel and Canyon gave up substantial management fees to work with distributors and expand their brand more quickly onshore.
The four other pilot scheme participants may have been less willing to do that. It is noticeable that Och-Ziff preferred to use direct marketing to reach out to end-investors.
But Shih at Z-Ben believes this could be the model for future QDLP managers to follow, particularly if Och-Ziff is able to fill its quota this quarter.
Interestingly, the Shanghai Financial Services Office recently released a circular underlining deregulation plans for the development of the QDLP scheme and private equity in general.
“There are many discussions between the Shanghai Financial Services Office and managers,” noted Wong, who is expected further quotas to be approved soon.
An SFO spokeswoman declined to comment on a timeframe for approval of more QDLP quota and mangers.
Only recently, the Shenzhen local government announced separate plans for its own QDLP scheme to operate in the city’s Qianhai free-trade zone. Shenzhen is planning to grant $1 billion in quotas collectively to foreign managers, Chinese media have reported.
“Shenzhen’s launch of QDLP scheme will bring competition to Shanghai,” Shi added.