A European Perspective
Dr. Katharine Neiss, Chief European Economist with PGIM Fixed Income, shares her views on the European-China relationship.
Institutional investor interest in increasing allocations to China continues to grow rapidly, not surprising given the sheer size and potential of the world's second-largest economy. Despite ample opportunities, however, investing in China is not without its risks, particularly when it comes to the country's complex private markets. In our latest installment of PGIM’s China Investment Symposium series, our panel of experts shared their insights on China’s commercial real estate, private equity, and venture capital markets.
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>> Keshav Rajagopalan. Good morning, good afternoon and good evening. My name is Keshav Rajagopalan. And I'm a member of the PGIM Institutional Relationship Group. Welcome to today's PGIM China Investment Symposium event on private markets. For those of you tuning into our PGIM China Investment Symposium series for the first time, what we've done over the last 12 months is take a look at investing in China from different angles and perspectives. We've taken a look at public markets, both equity and debt. We've taken a look at the geopolitics of China's relationship with other parts of the world, including the United States and Europe. And today, very excited to look at private markets for the first time, including real estate, private equity and venture capital. What makes this topic so important is when we're speaking with clients, institutional investors around the world, the biggest question is, how to think about investing in China. It presents a large opportunity, but with that comes risks. And what we've tried to do is bring different perspectives to the table to help untangle that risk and provide thoughts on how to assess the market and access it. And today, really excited about the esteemed panelists that are about to join us. But what I want to do is pull up two poll questions, just to get a sense of the audience in terms of where you all are on private market -- more private market investing in China. The global audience today is assembled from around the world. We actually have participants from North America, Europe, Africa, and Asia. So it'd be good to get a sense of where the room is on two questions. So if we can pull up the first poll question. So as you think about your private markets allocation to China today, where is your primary investment focus? Is it in venture capital, other private equity, or real estate, or more than one of the above? And while you're answering that question, I want to introduce the panelists now. So joining me from New York City is Brian O'Neil, the CIO of the Robert Wood Johnson Foundation. Calling in from Beijing, is Weichou Su, the Head of StepStone Group's Asia operations. And joining us from Singapore, my colleague, Cuong Nguyen who is the Head of Investment Research for Asia for PGIM Real Estate. Thank you all for joining us today. So let's take a look at where the room is on question number one. So looking at the results, it does seem actually real estate, Cuong, you'll be able to see, real estate edges out the other asset classes slightly. But of course, if you add venture capital and private equity together, it's almost equal. But there's actually about a third of the room that's invested in more than one of the above. So if we can take a look at the second poll question now. This one is just asking, how are you thinking about your allocation to China, in private markets? Are you increasing it, stay the same, decreasing it? So good to get a sense of the room's interest. And while you're answering that question, just one housekeeping item for everybody. We want to make sure that this conversation is interactive. So please at any time, use the Q&A function on your zoom webinar to ask questions. And I'll be taking a look at those live as they come in and asking them of our panel. So let's go ahead and show the results. So increase moderately 62%. So it sounds like it's not a whole full-fledged effort to increase your private market allocation substantially. But a good sense of the room is, we need to increase and think about, again how to allocate to China. Which is the exact point of this conversation. So with that, let's open it up to the panel. But the first section I wanted to really set the stage. As I mentioned, three panelists here with three different perspectives. And I wanted to start with Brian. Brian, of all the investors I've spoken to, you probably have had the longest experience, especially here in the United States, of someone who has interacted with, and involved with private markets in China for some time. I think almost two decades if I have that right. So I just want to -- if you could provide a little bit of the landscape of what your investment thesis has been and how you've seen the market evolve over the years?
>> Brian O'Neil: Sure, Thanks, Keshav. And good day everyone. I guess it's all different times. In 2005, when we started to invest in China, we kind of assumed that we would do what we did in other geographies and have some money in private equity funds and some money in public equities. But we quickly found It was very difficult to identify a good A-Shares manager. And in fact, I'd say we started a decade of rather unsuccessfully trying to find a good A-Shares manager. But on the private side, we very quickly encountered some managers that we thought looked like the type of folks we'd like to invest with on the private side. And their funds were being pointed directly at what we thought was the most attractive part of investing in China, emerging consumer, a little bit later technological innovation, and a little bit after that healthcare. So from the beginning, we started to put more money into privates than we had thought we might. And over the 15 year period, the private portfolio has grown to the point where, in 2015 we exited A-Shares just to manage the overall exposure. So from our point of view, private equity, particularly early stage venture type investing in China has been the best place to be.
>> Keshav Rajagopalan: That's great, very helpful. And Weichou, maybe I'll pivot over to you. You know, obviously at Stepstone, you advise a lot of asset owners on thinking about private markets in China. And I know your focus is venture capital and private equity. What are you seeing in the marketplace in terms of how the level of interest has changed over time?
>> Weichou Su: Yeah the interest has been on the increase. I would say exactly at the time span that Brian was talking about, you know, 10, 15 year period. They started in the late 1990's, you know, early 2000, a lot of players. But now you're at a time when just the market is very mature. It's almost like the US, you know, both the venture and private equity, this is the second largest market after the U.S. That gives you a sense, right? So if you look at venture, it's a really very mature ecosystem from, you know, an angel to, you know, early stage, you know, mid stage, late stage, all the way to private equity, growth capital, and buyout. So and not even to mention the strategics, right. So you all know who, the Unicorns, you know, these are global names. They're very inquisitive, you know. Somebody like Tencent will -- is putting out I think somewhere around $6 plus billion a year into private equity and venture. And it's just one firm. So very lively. Very dynamic. And it has generated greater returns, right. You were talking about public versus private. I think in emerging market, particularly in a place like China, the -- and its globally, but particularly here, the outperformance of private markets, private equity and venture versus other market, the gap has been huge, versus, you know, US and Europe. So that's why, I think what we hear and see from our client base, and these large global institutions. So you know, people are just basically asking the question, you know, how do I allocate to private markets? What's the best way? I think if you want a number overall, what I've seen is, you know, within the private equity bucket, Asia represents about, you know, 5% to 15% of the global portfolio, right. That's usually, you know, increasing from a small base to, you know, 10, 15, or in some cases 20%. So people are just really working, you know, with their -- within their organization on how to achieve a target, that is our target.
>> Keshav Rajagopalan: No, I think that theme, you know, that under allocation, the size of the market is large and there is an underlying allocation is a consistent theme we've even examined in our public markets events. Cuong, coming to you, you know, I think it may be a similar theme, but curious what you're seeing on the real estate side. Obviously, on the investment research side you're seeing all of Asia. How does China compare to Singapore, Hong Kong, and other maybe more well-trodden areas for institutional investors in terms of the real estate market?
>> Cuong : I have to say, I think, you know, for real estate, that would be very, very much similar to the private equity side as well. I think, you know, for the last 10 or 15 years, what we see that, you know, the scale of the market is a key driver for, you know, for an investor coming to -- into China. And currently, you know, compared to other developed markets in the region, like the -- like Singapore, Japan or Australia. I think, you know, China is very much on the equal footing. But, you know, what we see, you know, on the research side, not only that, you know, the size of the market has increased tremendously for the last ten years or so, because of the continued to build of the very quality of the [inaudible], across all the commercial sector. But also, you know, we see that the change in the quality of the market, so transparency in terms of, you know, the availability of the data. And also standardization for market practice, from the leasing to investment process. So with that then, you know, for the last five or ten years or so, what we've seen is foreign capital has been, you know, flowing into China and now accounting for around 30% of all the transaction volume in a year. And that is very much similar to the level that we see in, you know, Japan or Australia. Now other, you know, other points about the scale of the market, I think that is something for China will potentially go beyond the current state right now, is the sign of the recent market now is investable, universe, as estimate is already the largest in these past [inaudible]. So with that, and I think, you know, with the continued institutionalization of the commercial recent market then, we will -- we should see, you know, more and more capital going to China.
>> Keshav Rajagopalan: No, very, very helpful. So sounds like that same theme of opportunity is there. So Cuong, staying with you for a little bit then, what are the key themes that you're seeing and the research team and also our portfolio managers and PGIM Real Estate are focused on when it comes to China. You know, I'm sitting in my office in New York City right now. It's great that New York is coming back alive. I know China, obviously accelerated out of the pandemic a lot faster than much of the rest of the world. What are the key real estate themes, both related to the pandemic, but even, you know, outside of the pandemic as we think long term?
>> Cuong Nguyen: Absolutely. I think, you know, the benefit of having exposure to a market as big as China, you know, shown very much last year. So China was almost like the only market and is -- fast way if not in the world of seeing transaction volume actually tick up a little bit last year. So almost like 40 billion of transaction real estate last year alone. Now talking about the investment opportunity then I think, you know, what's important for recent investor is the drive of demand for commercial real estate will be driven very much by the economic and demographic force within the economy. So with China then I think, you know, two major thing that will continue to drive demand for, you know, from the leasing side. And with that will be, you know, on the on the capital side as well. First of all is the continue of the structural shift toward more of a service by, and information by sector, which is including the technology as well. So what we have seen that for the last, you know, ten years or so, that net absorption or, you know, the company expanding more into a greater, or better quality stock within, you know, tier one market in China, or Shanghai, Beijing, Shenzhen, [inaudible] has been, you know, a significant shift from a MSC or multinational company, as an occupier. Now majority of the demand are driven by domestic firm. So that's creating a significant, you know, talent base or the markets in the resilience, you know, for China -- for the office sector. And the second key driver for China reset is on the consumer side as well. So very much that the structure of the economy was shifting and already, you know, seeing that picking up very much for the last five years is shifting from export driven into a more consumption base. And with that and you see that, you know, retail sales growth has been like phenomenal. Now, you know, roughly about $7 trillion of retail sales every year that China is already among, you know, I think it was the second biggest consumer market in the world. And it's still growing about 10% per annum. But the opportunity for reset in there is not for, you know, for the central or more physical retail space. But actually on the [inaudible] side. Because, you know, Chinese consumers are shifting beyond that physical shopping and go directly online. So we see that a phenomenal demand for [inaudible] market in China. So a lot of capital has been flowing into these two sector, because of these, you know, of driver of the structure of the economy. And, of course like, you know, other sectors that we will see, you know, continue to immerse as well that more on the demographic side, the residential, rental for sales. And also the same housing sector that continue, you know, or start emerge, you know, currently. And particularly over the next decade or so when the Chinese demographic, you know, become more aging, you know. So the demand for senior housing sector will pick up. So that is I think, that's very much, you know, key driver from the macro perspective for the risk and demand.
>> Keshav Rajagopalan: No, very helpful. And Brian, I know in our past conversations, you've highlighted in terms of what the foundation is looking at from themes, similar to what Cuong just highlighted, consumer, healthcare, technology, largely driven by structural shifts and demographics. Would love to hear a little bit from your perspective on kind of the PEVC landscape as it reflects those themes.
>> Brian O'Neil: Sure, let's go a little deeper into those themes. You know, if you go back more than ten years, the obvious thing that was going on in China was the emerging consumer, as people were becoming more affluent as Cuong said, able to buy things and do things. And so we were looking at consumer oriented managers and companies. But really even at that point, the technology was a very important part of these businesses. And there is, as of course as we all know today, a great deal of technological expertise in China. So to give you an example, we were fortunate enough to be an early investor in a telephone company called Xiaomi. And Xiaomi could be viewed as a handset maker. But in fact what they do is they present to their consumers a whole ecology of telephonic features, but also other apps. You can do your banking, you can do everything, and hopefully you never switch. And so the technology and consumer areas have been very interrelated. And then a few years later, as people become more affluent, they want to spend more money on healthcare, and that's an emerging theme for us that we think is very attractive and is going to have a long, long run in China. And the amazing thing is they are very close to, if not at the cutting edge, of healthcare research, as well as building out the physical infrastructure of hospitals and medical facilities in China. And one of our portfolio companies there, a company called GRAIL, is literally at the cutting edge in early detection of cancer, and may really make a difference as to how cancer is detected and treated. So those are and continue to be very attractive places to invest.
>> Keshav Rajagopalan: So Weichou, coming to you, you know, Cuong, Brian and I obviously sit outside of China, you're on the ground there in Beijing, what are you seeing in the PEVC ecosystem? And then what are GPs thinking about? You know, obviously, Brian and his team have been very successful looking at the market. But what are some of the emerging themes and maybe some of the things investors should know about, and kind of be on the forefront of looking out for?
>> Weichou Su: Yeah, I think Cuong and Brian all touched on that. Basically, it's really these new, we call it, new economy sectors, right. Healthcare, you know, consumer, you know, Brian, you know, talked about them at the outset. Technology, internet, education, you know, that's all have to do with the burgeoning middle class. Entertainment, right. So all these areas versus the traditional old economy, you know, there you have, you know, these -- some manufacturing, you know, cement, glass and all these kinds of things, right. Again, just to talk a little bit about private versus public. So on the public side, as you know China, you know, the private market is over represented by these large SOE firms, the telco firms, you know, the energy firm, the chemical firm, the large SOE banks. Whereas the private market is really, you know, very vibrant, is really driven by this theme of, you know, urbanization, you know, burning the middle class, you know, consumption. So that's really the mega force that is driving everything. And this is not China, not that China is an exception. Every other country, large or small, when they went through this, you know, a process from a middle income country to a high income country, you know, the consumption, the service oriented economy would, you know, come into shape, right. This was today -- China household consumption is about 40% of, you know, the nation's GDP. According to McKinsey, you know, China will continue to grow the household consumption like 8% a year for the next eight years. China will still be at half of the US level. That gives you a sense, right. So I think the theme -- one theme I want to bring out is really where -- how technology intersects sort of traditional consumer. You know, think of retail, you know, [inaudible], the, you know, 30,000 shoe stores. Right. [Foreign Language], these are all, you know, tech driven, consumer retail place, right. You don't see this, you know, at that scale in a lot of other places. Distribution, you know, [inaudible] that certainly is more broadly in southeast Asia, India, US, you see that. But here the sheer scale is mind boggling. The delivery, right, entertainment, you know, [inaudible], IT, you know, [inaudible], payment, no need to mention them, WeChat and Alipay. This is the, you know, the way that technology gets into everyday life. And it is a good example, COVID, right. The way COVID is tracked, everybody where ever you go, you show a code, you scan a code. You know, I was in the US, so you still have these handwritten cards after you get the vaccine, right. This is just not -- unheard of over here, right. It's all -- everything is on a mobile, right. Wherever you go, you need to show where you have been, you know, last three, two, three weeks. So that's just normal everywhere -- everybody accepts that. And the other area of innovation, again talking about, you know, an innovation driven economy, is really in the healthcare sector, right. So this is not just a traditional Chinese drug, it's really digital health, but particularly innovative drugs, right. So for me to -- me better to truly innovative first in class, biotech and new drug development. That's a huge area. I think just in China probably there are no less than 50 venture funds, growth funds, focused just on healthcare. That gives you a sense of the scale. I mean so we probably backed around ten just healthcare focus specialists. And that's what we like. We want deep expertise, deep knowledge, and real focus. Yeah.
>> Keshav Rajagopalan: Sticking with that healthcare theme, we actually got a question from the audience. And I'll take that opportunity to encourage others to use the Q&A feature to submit questions. Weichou on the healthcare theme, there's a question around whether the healthcare innovations that are being, you know, coming through the ecosystem now, are they for just the market in China where obviously there's ample opportunity and demand? Or are you starting to see some of it also being readied for export to maybe other parts of the developing world, or even the developed world?
>> Weichou Su: Yeah. This takes time. I think that question is right on. So up until now it's largely predominantly for domestic consumption. There is also a strategy called licensing in. Meaning you team up with a large US or European pharma, you say this is in, you know, second phase FDA approval, we'd like to take the China rights. You know, here's a down payment, and we have revenue sharing. This here has been going on for the last ten years. You know, 10, 15 years ago this area, this innovative drug area in China is not quite there. So now, as they say there's not just me -- to me better as quite a number of, you know, first in class globally, these kinds of innovations. So when that happens, you're already, over the last 12 months, there are, you know, deals being kind of struck by these large global pharma to, again, license these Chinese innovations to be applied globally. Yeah, that's still small at the kind of early stage. But that's kind of -- it's happen -- already happening. The reason of course this has such a huge boom, is because the right -- regulatory change, you know, the policymakers really made it easy for this, you know, capital market. There was a lot of changes there. New doors open in Hong Kong and China to allow these innovative firms to get listed. You know, the traditional historical long, decades long under supply, you know, the middle class, they're asking for better healthcare. So all that, right. So it's contributed this kind of huge boom in the sector.
>> Keshav Rajagopalan: No, that's very helpful. And now to pivot a little from themes. I think a lot of, you know, institutional investors want to get into tactics, right. So let's talk a little bit about picking a partner. And Brian, maybe I'll start with you. You've been doing this for 15 plus years. How do you think about picking the right partner? How do you build those relationships? And then there was also the question from the audience and -- to provide -- we'd love your perspective on how does maybe compare and contrast, how do venture capital and private equity firms operate in China in terms of investing in portfolio companies versus maybe what you see in the United States or parts of Europe?
>> Brian O'Neil: OK, you know, Keshav, I'm going to answer that question. But when we approached the market 15 years ago, and someone who's getting started today, things are very, very different. But at that time we felt that we needed to have a partner who would work with us, who was on the ground and spoke the language. So we and one other institutional investor, helped start a fund to funds, a private equity fund to funds based in China. And the idea was, they would do all the frontline work. They would raise some money from others, although if they only got money from us, that was going to be fine. And they would introduce us to the people that they thought were the best. And that was how we got started. And it really worked quite well. We met a lot of managers through them. We were actually able to introduce them to a few. And the performance of those funds has generally been good. But as is often the case with fund to funds, over time your customers start doing it themselves. And so today, we're less reliant on that and more reliant on our own relationships. But I still think that's probably a good way to begin, if you're literally brand new to investing in private equity funds in China. And, you know, there is a lot going on. Weichou was saying how many funds there are now. And that's great in that there are more opportunities, but it's also more difficult to find out who is going to be good. So I think one way or another, a local partner is pretty useful.
>> Keshav Rajagopalan: Weichou, bringing you into that to provide a perspective, how are you advising clients on GP selection, especially, as Brian pointed out, and you mentioned, you know, the vast array now GPs that are out there? How do you know where, you know, the juice is worth the squeeze? And it's worth building that relationship?
>> Weichou Su: Yeah, if you look at how the market develop, it really started, yeah. As I said, you know, 10, 15 years ago, when people like Brian came over, really and kind of created the sector almost, right. So the entire model, venture and private equity, you know, was borrowed from the US, you know, just really copied here. You know, people like Brian and his team, came over and the backed some early managers, and some of them became hugely successful. As they become very successful its, you know, like in the US, the top ventures are, you know, are hard to access, right. So it's great, you know, for people like, you know, Robert Wood Johnson, that that kind of foundations and endowments. So they already kind of know who the big guys are. As Brian was saying you know, the market and I have thousands and thousands of players, right. So it's just really -- it's more difficult in sense to pick a good manager. So you -- it's all about, for us it's really, you know, as Brian was saying, again, it's about being local, being based here, kind of know what's going on. You really need to know the team and people. You were asking, what's the difference between here and the US, again, you know, this, you know, everything happened probably 20, 30 years later after, you know, the US model became very mature. So one -- and the market was developing so fast, all -- overnight you have so many players, it's a lot of capital. In those days, again, they're only a capital from, you know, people like Brian. But now there's domestic capital, global capital, so capital is no longer an issue. The problem that creates is a huge, you know, team turnover, you know, instability. So really a team and people is, you know, is by far the most important thing. So we just need to, you know, can't just have a meeting -- one meeting with the two founders and you're done, right. But that kind of won't work. Just if you really need to know the entire branch, you need to know the dynamic, the economics, how things work. And you need to know the history, the true story about deal attribution, right. That can, you know, you can only do that if you have a big network, you know, what's going on, right. So I think that's probably one area it's a little bit different here. It's just more messy. Just, you know, so everything goes, right. Whereas in the US probably you can say it's more settled, right.
>> Keshav Rajagopalan: Cuong, a question came in, you know, on the real estate side, you know, PGIM Real Estate, we have colleagues on the ground now in Shanghai, but probably picking a partner when it comes to development and really trying to make those investment themes you mentioned earlier come to life is important. So how are we thinking about picking a partner or finding the right folks to work with to develop different opportunities in logistics or residential or some of the other sectors you mentioned?
>> Cuong Nguyen: No, I think, you know, what Brian and Weichou mentioned about, you know, having a local partner on the ground, have a team on the ground and then, you know, knowing that the partner is very critical. So the example that he just said here in term of [inaudible] logistic sector, for example. So the demand side of logistic is, you know, is very obvious. And it doesn't need a genius to figure it out, you know, the demand will be strong. But, you know, at the local part the role for finding the right one is the one that actually having a local connection to unlock land, where we get, you know, develop a new project. Where actually, you know, in the local governments in China tend to, you know, limit the supply of that land for logistic, because of the lack of taxpayer money. And also the lack of I think, you know, employment operate -- opportunity from those logistics firm. So having a, someone on the ground, knowing that how to figure it out, and how to, you know, having a real network to unlock that is very critical. And also I think, you know, just stay with logistic for now. It's no longer that, you know, you just only have one warehouse stand alone and having success. Now the demand is not about, you know, having, you know, one store or two, or one warehouse to come to the clients. But you need to have multiple, and you can provide a solution. So not only like one store or warehouse in Shanghai, but you need to have a network of all that offering in other cities as well. So that we, you know, require a lot of like, you know, what Weichou was just saying, a little bit like in the local network, a little bit messy, but that's where I think, you know, that the local presence is very critical.
>> Keshav Rajagopalan: That's very helpful. So we'll pivot to the last section on a bit of the regulatory environment, but I also want to remind everybody to please submit questions. We just have a little shy of 20 minutes with left today's panel, so please send along your thoughts and questions. But Cuong, staying with you on the regulatory side now. You know, we talked about in previous China investment symposium events, how much the government is doing to support the development of public markets. Now China's public equity and public debt markets are the second largest in the world. Weichou mentioned that that's the same on the private equity and venture capital side. What is happening in real estate and other private markets in terms of government involvement and that evolution of deepening capital markets, to really also attract foreign investment, I'm guessing, that's a big part of what they're trying to do. So what are you seeing?
>> Cuong Nguyen: Yeah, no sure. I think, you know, apart from what I mentioned before, in terms of like supporting your market to become more standardized, and more transparent. Allow, you know, a network of information sharing and collecting data, not only at the private sector side, but also from the public side as well. But, you know, say on the capital market then just last one month that the Shanghai Stock Exchange now, you know, accept obligation for infrastructure reads. So that reset trust funds. Which is very popular in all the market in Asia, so Singapore, Japan, Australia, very successful to have rich sector as a channel for, you know, individual investor to invest in big project of real estate. Now this has been, you know, going on for years, discussing because of all the taxes and distributions of the income. However, that now is coming to form, that, you know, that rates will happen this year. And that will be a big change for, you know, recent markets in general. So there will be more, even more capital available for resale. Now, you know, if you say in the, you know, the regulations that's supporting or change market going forward, I think a couple of things. On the residential market side I think, you know, for the last few years that has been very clear that housing affordability is on the forefront of the Chinese government, you know, policy. And nudging and pushing for developer to provide a, you know, better affordable housing is one of the key policy initiatives that will continue to get support from the government side. But at the same time, we're seeing that now a pushing for more of residential for rent as well. And there will be more incentive for developer investor to join into that sector. So that is something that I think, you know, we'll look -- continue to look very attractive from, you know, from investor perspective, that we see thing more support from the board -- from policy side. Something that I think may be a little bit more of a technical and opportunity a little bit at the moment is that China currently is probably the only market globally starting to do a bit of credit tightening. So, you know, in a recent study it is one of a, you know, a target sector where the government tried to like -- to tame the [inaudible] more or less on the residential sector side. But it will somehow impact in terms of commercial sector as well. So in the past there were a few episodes that we see, you know, Chinese government to do a bit of like, you know, tightening and easing and tightening again in 2015, 2018, and by middle of last year as well. So our experience so who invest exactly in that tightening cycle, and as, you know, Brian mentioned that maybe in some market and including, you know, high quality real estate as well, is no lack of capital chasing assets. So a little bit, you know, credit tightening right now could be, you know, could open opportunity for, you know, for investor to come in. Not to buy a discount because we haven't seen, you know, that impacting on pricing yet. But at least from the front that, you know, you will see a less competition from domestic capital. So on that then I think, you know, just let me finish on that policy side, and I think it's very, very important that we see in other country in the Europe market as well, is the governments, you know, ESG in very high in agenda as well. So we see that now the green building, net zero carbon emissions, or promote -- a promotion for an environmental certified buildings will be very important. It's not clear yet in terms of how that will be rolled out. But very soon I think that we will be playing a role that investor need to watch out. Now this is not saying that it will be different compared to what we are experiencing other, you know, markets in those area and also in US and Europe in terms of the ESG approach. But it's just saying that, you know, in China that is also a playing field that, you know, the investor need to play on that environmental building.
>> Keshav Rajagopalan: No, no, thanks for judging on ESG, we definitely, in a future China investment symposium might want to dive deeper into that. Brian, coming to you, we're getting a lot of questions, and I teed this up with you and I know we've had conversations about this in the past, but repatriation challenges. You know, how our investments monetized in the private market space? What's the exit strategy you see? And then once they are monetized, how do you get the money out? That is kind of the question that we're seeing now and probably one of the overarching risks that may create some hesitation.
>> Brian O'Neil: Well we have had mostly positive experiences. In the venture area a lot of times you get a distribution of stock from a manager. And those shares are readily saleable when we get them, if we choose to do that, or we can hold on to them and sell them later. And there have never been any real glitches there. And there's never been any difficulty, you know, getting the funds back into our bank account. The one time we had a problem was in 2016. And it was when we were liquidating our A-Shares portfolio. And this was the time when the market had zoomed and then kind of tanked. And a lot of companies' stocks stopped trading. And so at that point, we were asking for a redemption. But if a stock wasn't trading, then you had to get an audit of your fund, not counting that stock. And then if they started you had to do it all over again. So that particular event took us a long time, but it's over and done with now and I -- so I don't really know if it's like that anymore. But certainly the stock distribution and cash distribution for private equity funds has not been an issue for us.
>> Keshav Rajagopalan: Yeah if [inaudible].
>> Weichou Su: [Inaudible].
>> Keshav Rajagopalan: Yeah, yeah. I wanted to bring you into this.
>> Weichou Su: Yeah, Keshav, I feel the policy is getting more and more open, just here -- kind of looking from here on the ground. That I -- people have been talking about the new QAFLP programs. Meaning you can get capital in and the investing arm deals. So you convert your USD upfront so that that kind of yield is now been implemented quite in a number of cities and provinces. The other is QDLP, you know, particularly in the high nine and a few other provinces. Meaning you can raise domestic in RMB capital and then convert into USD and don't need to worry about the sort of capital control, right. You -- but you need to get a quota up front. So these things are, you know, very positive for investors like us. In terms of repatriation, you know, we've done deals, direct deals, co-investment deals with our partner, take private from US on a large, large tech, a Chinese firm, and then convert it to a domestic structure listed on A-Share and exit from there. So no issue there. Yeah, you can't -- like because they -- the tech private guys own, you know, a majority of the firm. They can't get out, you know, one day. So it took like kind of a period of time. Capital to be repatriated, as long as, you know, the coming in road -- route is clear, there's no issue, I haven't heard of any issue. So the only issue is timing, right. Some is not going to be, you know, within two weeks. So I've heard, you know, sometimes as long as six months, you know, before you can really get all the papers lined up and to get the capital. I've yet to hear one case where you can't get the money out. So, you know, private equity and venture has been here for 10, 20 years. This is nobody had -- I don't think anybody has seen that. So the other kind of a regulatory change, you know, people talk about today quite often is antitrust, right, and financial, you already know that story. You know, again from here, I think definitely there's politics involved there, right. But also, you know, you have to look at the larger picture of the background. The background is that China probably has adopted the most open and laissez faire sort of a regulatory stance over the last two decades, when it comes to, you know, these large tech firms. In the name of encouraging innovation, you know, encouraging economic growth. So we're at a time when, you know, the -- you have a monopolistic forces, which is -- or a smothering kind of smaller firms and a new kind of upstarts. So there's a lot of complaint. I think that's also part of the story. So we'll see how this is, you know, what will play out. So we're still in the midst of this. You know, here again, you know, a lot of people are, I think this is positive, and there was also a lot of complaints. So we're still -- this is the kind of things are still shifting around. So we have not seen the end of the movie yet.
>> Keshav Rajagopalan: No, no, yeah, and I'm sure, Brian mentioned the 2016 to now, I think things are moving quickly. And like you said, we have to let it unfold. For, you know, an investor outside of China, we've all talked about kind of on the ground -- need for on the ground expertise. Getting some questions about kind of legal advice. What I guess, Weichou, what have you advised clients on in terms of getting right legal expertise to help navigate different frameworks? And Brian, would love your perspective as well. But just curious whether, you know, people are using firms based in their home country and develop, you know, hope that they have the expertise. Are there good firms and in China to look at and examine as well, from the legal perspective? Weichou Su: Yeah. So if you're talking about, you know, investing in China, not, you know, being here. And of course there are all these global firms, US firms, you know, Hong Kong, Beijing, or West Coast, East Coast in the US that can help you. And they really have been dealing with this for decades and decades. They would know these things the inside out. But if you are operating here in China, right, if you, you know, want to exit or you want to list domestically, you want to change, you know, your investment structure here domestically, you need to work with a local firm. But the way it works is the foreign, the global firms all have a local partner, basically they work hand in hand. Because they don't -- legally they can't provide, you know, advice here on the ground, since they work with some of their partners. So it's seamless. It's very -- it's not an issue.
>> Keshav Rajagopalan: Brian [inaudible].
>> Brian O'Neil: Yeah, I'm fortunate to be able to give you a short answer. We haven't had to have any special legal assistance so far, and let's hope it stays that way.
>> Keshav Rajagopalan: No, well that's good. I think that's promising I think for investors looking at the market, it sounds like the biggest thing is timing, like you said, way to just understanding that, you know, that exit or those next steps may just not happen immediately. So you have to let it unfold. And then hopefully as kind of market structure and market dynamics are changing, there's all those timeframes that have been shortened. I want to --
>> Weichou Su: Yeah [inaudible].
>> Keshav Rajagopalan: Go ahead Weichou.
>> Weichou Su: If you are an investor based in Europe and the US you invest in these USD fund, you know, operating here in China. The typical structure is that fund is domesticated, not inside China, but outside China, right. They have a domestic entity that is providing service to this fund. So you don't need to come into any kind of legal or regulatory issue within China. Because the GP handles that. So basically, you're investing in a Cayman, or Hong Kong, or Singapore based, or a Delaware based firm. And you're not getting -- having anything to do with anything inside China. The GP handles all that. It converts the RMB, you know, USD into RMD and gets it out to the street to the accountant -- [inaudible] account. And then we pay to, you know, to get it to you. So this is not -- you don't need to worry a thing. That has been, you know, the typical structure. Of course, if you invest domestically, you set up an operation here is different.
>> Keshav Rajagopalan: No, that's a -- it's a helpful and important distinction to make. But no, yeah, thank you. Cuong, I wanted to ask you a, you know, a final question, just on real estate markets. Where do you see things evolving over the next five to ten years, both in terms of how we're thinking about it, and -- or opportunity set, but as you think about foreign capital coming in, if you kind of look forward? That was a question, people are trying to kind of think on the long term here, and what's the opportunity for foreign investors in real estate?
>> Cuong Nguyen: Yeah, I think we touched on this a couple of times, you know, during this conversation. I think maybe similar on the private equity side as well, is the global investor now, you know, consider China as very much a market that too big to ignore. But still like in terms of the scale of the market and the ratio of the capital allocation to the market is still very much, I think you know, say that underweight to some extent, right. Now before that is very much, you know, being constrained by availability to stock, and also availability to investment opportunity for the perspective is, you know, coming in and buy -- starting building -- with producing more of a, you know, a stable income right. Now with the Chinese economy, very clear that, you know, metering from both corporate side and also that from the consumer side, as we touched on as well. Now looking very much like in the basic demand for commercial real estate is looking very resilient. And the economy I think, you know, provide everything from last year or beyond, you know, for the last 10 or 20 years is, you know, being able to manage, you know, even when it face an external shock. So very much like, you know, China will become a bigger role play in a global real estate investor, not only from the, you know, a return [inaudible], but also very much from the diversification perspective as well. So I think, you know, if I, you know, stay and look beyond the next five and ten years, I think that we are very much structurally optimistic for China, where we see that continued growth of investor, you know, investment stock, we should continue to see the growth of liquidity within the market. And let's say that, you know, currently a lot of investment has been focused on either, you know, the tier one markets. So remember that China still have a vast, you know, number of other city, the tier two city like, you know, Chengdu, Chongqing, where I think the scales is still like massive compared to other markets, including Singapore, right. So I think, you know, the potential there is still phenomenon. And yeah I mean like, you know, looking beyond the medium term in five to ten years, I'm very, very optimistic that, you know, that more and more capital growing and then, you know, China to play a bigger role in the global portfolio.
>> Keshav Rajagopalan: No, no, very, I think you nailed it on the head. It's kind of a consistent theme with other events. Brian and Weichou, you touched on this as well. It's the under allocation that institutional investors have maybe with the exception of those like the Robert Wood Johnson Foundation have been doing this for a while. But there is that structural under allocation. And I think as markets continue to, you know, become more dynamic there is an opportunity that investors can overlook. So I wanted to thank Cuong and Weichou, especially for you for staying up so late. I know it's about to be 10:00 p.m. there, so our thanks to you. And Brian, our sincere thanks. And thanks to all the attendees for joining, we hope it's been an enlightening conversation. We have more events forthcoming, including touching upon a few of the themes that everyone mentioned today, including looking at debt and understanding the debt dynamics in the public and private sector. As well as the dynamics of the technology sector. So please stay tuned for future events.
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