ASIA VIEW: A challenging transition

Speaking at PERE’s annual China conference last month, Changfeng Deng, chief executive of V Capital, the investment management platform of China Vanke set up in late 2015, sought to explain the motivations behind one of the country’s biggest residential developers foraying into the manager space.

The objective, he said, is to expand China Vanke’s operations to include a new business line and have an additional revenue stream through fee income.

China Vanke is one high-profile example of a small number of Chinese developers harboring ambitions of launching their own investment management platform to raise third-party capital and earn asset management fees.

The developer-turned-manager model is not uncommon elsewhere in the world. Singapore’s CapitaLand and Keppel Land are two examples that have had demonstrable success in that regard. The model was also attempted in China around eight to nine years ago. Gemdale, for instance, launched its first US-dollar denominated fund in China in 2008 through Wins Investment, its fund management platform. As of year-end 2015, according to the most recent data available on its website, Wins Investment claimed to have $3.6 billion in assets under management.

But the trend did not take off in China, and that is not entirely surprising. The sole focus on growing the AUM has been a major hindrance in allowing this model to become successful. Developers-turned-managers will need to prove to investors not just that they will function independently from the parent company with no conflict of interest – but also that they can be a good fiduciary.

A developer seeking to become a fund manager therefore often needs to answer a host of questions around potential conflict of interest issues: If the investment manager ends up acquiring its parent company’s completed projects, then where does the alignment of interest lie? Would the manager be obligated to buy the asset at a cost that maximizes the developer’s margins, or would it negotiate the best possible outcome for its investors? Equally pertinent is the question of why these developers would want to get into the manager space right now. Is it merely to tap institutional funding for their own development projects at a time of a liquidity crunch? The Chinese government has been tightening the availability of credit to fund construction and real estate development in a bid to bring down residential property prices. Bond issuances by property developers, for instance, have reportedly come under regulatory scrutiny.

This time around, diversification into a new business line appears to be one of the main objectives prompting this trend. Even if this is the case, these managers would still need to be transparent in disclosing whether the parent company would get a share of the carried interest and other income generated from the business.

Testing waters
V Capital has said that it would not purchase China Vanke’s assets and only transact with other developers across different property types. The two deals it has done so far attest to that. A V Capital spokesman acknowledged the fee arrangement concern, but he told PERE that the firm would eventually look to solve this by bringing in external shareholders to dilute China Vanke’s stake in the platform. The real test, however, will come when V Capital raises its first blind-pool commingled fund. And for other developers following the trend, the key is to not repeat mistakes of the past.