Private investment office PCH eyes China venture and hedge funds
Proprietary Capital Holdings (PCH), a Singapore investment firm that manages assets for a group of wealthy European families, is considering how best to allocate to China amid large capital outflows from the country.
Options on the table include hedge funds, investments in start-ups both directly and via venture capital firms, and adding to its passive China exposure, PCH chief executive Roxanne Davies told AsianInvestor.
The Chinese market is not showing obvious buy signals now, so a very selective approach is needed for building on PCH’s relatively small allocation, she said. “We would like to grow it as we find the right partners and understand the risks we are taking.”
That is easier said than done. China has seen heavy net outflows since early 2020 amid headwinds including property sector problems, declining consumer confidence, an aging population and geopolitical risks.
The most recent figure recorded by Trading Economics showed a capital and financial account deficit of $74 billion in the first quarter of 2024 (see chart below).
CHINA CAPITAL FLOWS, 2014 to Q1 2024
Chinese equities have suffered net outflows every month from April to July, posting a total of $3.5 billion exiting, according to the International Institute of Finance.
However, while European and US institutions have been pulling money out, investors in the Middle East, Southeast Asia and elsewhere are still showing interest, but want to see stronger domestic policy signals and economic data, said fund managers.
Davies made a similar point, saying: “Entry levels are interesting, but are not corroborated by other indicators. Sentiment, unemployment and consumption – those are not giving positive signals.”
It is difficult to know when the right time is to pour money into Chinese assets, she admitted. “So, we need to think about this from a liquidity and risk perspective.”
“We dabble, because if you’re not there at all, you don’t know if it’s worth going in. You have to live and breathe it; you’ve got to look at the markets with some skin in the game.”
VENTURE OR HEDGE FUNDS?
Investing in startups via venture capital firms has not been a favoured strategy for PCH for the last seven or eight years, as AsianInvestor previously reported.
“The group has looked at different options, from directs to bets deemed safer such as university spinouts,” Davies said.
“The venture industry in China is innovative and the current stage of the cycle seems attractive. We are looking at firms that have specific attributes we value and with whom we have established relationships.”
She declined to give any names or elaborate further on the attributes in question.
Meanwhile, PCH has been “following China hedge funds for a long time”, said Davies. “Some stand out as able to navigate well enough the toughest few years the market has seen.”
“If we decided to allocate to a hedge fund, we would size it so that if we're wrong about something, we can either get out, or so that the loss is acceptable in relation to the overall size of the portfolio.”
The option to take passive market exposure, such as via sector-focused exchange-traded funds, is being studied, but the timing does not feel right, Davies added.
Ultimately, while PCH is not bearish on China, she said, it remains cautious about the market. This reflects the approach taken by many global investors.
Beijing is often unpredictable in terms of market rules and moves it makes, such as the August 19 decision to stop publishing daily data on foreign inflows into Chinese stocks amid consistently negative numbers. As international investors commented at the time, such non-transparent moves don’t tend to breed confidence.
FREE OF POLITICAL PRESSURE
Regulatory uncertainties aside, PCH can make decisions on Chinese investments free of public or political pressure, Davies pointed out.
“Family offices are more likely to be spared politicisation in their ICs [investment committees], and can invest or not invest where they see fit depending on the economics or commercial aspects of a situation,” she added.
“We don’t play politics but are mindful of geopolitical winds that define capital flows,” Davies said. “However, currently we don’t have the bandwidth to identify those opportunities [in China] at scale and take advantage of them.
“So, we like to speak with and learn from families with knowledge of that market and move cautiously.”