UBS and Hamilton Lane are two of the largest alternative investment managers globally, overseeing more than $8 trillion in assets. They both recently established new offices in Shanghai, reflecting the growing importance of China’s private markets. China has become the second largest economy and Asia’s biggest private investment market. These firms aim to tap into the region’s capital market growth and investment opportunities.
In China, UBS was the first foreign firm to obtain a private fund management license. Other major firms like Bridgewater, Blackstone and Carlyle have also been aggressively expanding in China. The country has become increasingly open to foreign participation in recent years. Over 35 foreign private securities funds have been approved, along with the first foreign-controlled futures company. As global asset managers remain confident about China’s prospects, its financial landscape will continue shifting.
Major foreign PE firms are entering China at faster pace
Hamilton Lane and UBS are among the latest major global alternative investment firms to enter China. UBS was the first to register as a wholly foreign-owned private securities manager in 2015. It also became the first firm to receive a private fund management license in 2017. Its asset management division is located in the Shanghai Free Trade Zone.
Bridgewater, founded by Ray Dalio, has been aggressively expanding in China as well. After setting up in 2018, its AUM exceeded RMB 10 billion by 2021, becoming the country’s first foreign private fund over that threshold. Blackstone also launched its Private Wealth Solutions group in China last year. Other firms like Neuberger Berman, Wellington Management and L Catterton have entered along with dozens of others.
The trend reflects China’s increasing openness to foreign participation across its financial sector. Regulators have approved over 35 foreign-controlled private securities funds. The country’s first foreign-controlled futures company was also accepted last year. As the world’s second largest economy, China remains an attractive long-term bet for global asset managers.
Shanghai has become the preferred destination
Among foreign alternative investment firms entering China, the majority favor Shanghai as their first location of choice. Shanghai hosts the headquarters for 92% of all private fund managers in China, according to a joint report from PwC, UBS and other institutions.
The city has actively positioned itself as an international financial and innovation hub. Last year, Shanghai’s pilot Qualified Foreign Limited Partnership program enabled Hamilton Lane to establish the country’s first S Fund through QFLP. The municipal government has rolled out various incentives and preferential policies to attract foreign financial institutions.
As a leading global financial center, Shanghai offers alternative investment managers proximity to key state-owned enterprises, large conglomerates and developed capital markets. Establishing a mainland presence enables deeper relationships with potential investee partners and deal sourcing channels. Shanghai continues to solidify its standing as the top destination for global asset managers looking to tap into China’s growth.
Regulatory changes are creating new opportunities
China’s financial regulators have enacted various reforms in recent years that open its markets to greater foreign participation. The liberalization of financial services under the RCEP trade agreement promises to accelerate this trend. Wholly foreign-owned wealth management companies are now permitted along with easier access to derivatives trading and local exchanges.
On the private fund side specifically, regulators have enacted changes to allow foreign managers to fully own onshore private securities funds. This is a major shift from the previous requirement to establish joint ventures with local partners. Registration processes have also been simplified for launching funds focused on restricted industries like sci-tech innovation.
These measures all serve to boost international investor access and interest. By allowing firms like Hamilton Lane and UBS to more seamlessly establish local operations, China enhances foreign capital inflow that can benefit the domestic economy. Financial opening will continue as a key priority according to top policymakers. Ongoing reforms create new opportunities that global alternative investment managers are keen to capture early.
Private markets in China still have massive room for growth
Alternative investment firms are entering China because they recognize the massive untapped potential in its private markets. Private fund AUM totaled RMB 6 trillion in August 2022. While massive in absolute terms, that only represents a 7.5% share of the total assets under management by securities firms.
By comparisons, private markets account for over 15% of AUM in countries like the U.S. This highlights the growth headroom for private equity, venture capital and other alternative asset classes to power China’s capital markets of the future.
Outside of real estate, alternative investments only accounted for 10.5% of household financial assets in 2020. That figure is still considerably lower than in countries like the U.S. and U.K. And China’s household savings rate of 38.7% is nearly 3x higher than America’s. As more of this capital shifts into private markets, foreign managers want an early mover advantage in securing LP commitments locally.
Major global alternative investment managers like UBS and Hamilton Lane are rapidly expanding into China, with Shanghai as the preferred destination. Regulatory changes enabling wholly foreign-owned private funds coupled with the vast growth potential in China’s private markets are attracting foreign capital inflows. With China’s financial sector opening accelerating, its private fund industry will continue moving up the ladder globally.