10 Special reportAsset management The EconomistNovember 14th 2020
21funds beat the market—these being simply the funds that have
survived the cull of underperformers. The private-equitybusiness
is notorious for selecting metrics that flatteritsperformance.
Nonetheless, over the long haul, the best private-equityfundsdo
really well. A landmark study led by StevenKaplan,oftheUniver-
sity of Chicago, found that venture-capitalandbuy-outfunds,on
average, beat the s&p 500 index over the longterm.Therangewas
wide. Funds in the top quartile did much betterthanaverage;those
in the bottom quartile did a lot worse. Pension-fundmanagersfac-
ing big deficits have an incentive to put moneyintoprivateassets
in the hope that their fund will be one of thewinners.
As more capital chases opportunities, theevidencepointstodi-
minishing returns. Mr Kaplan and his colleaguesfindthatreturns
in the buy-out industry beat the stockmarketinnearlyallyearsbe-
fore 2006, but broadly matched the s&p 500 afterwards.Private-
equity funds used to buy businesses that werecheaperthanlisted
firms. But the competition is keener now. Thebiggerbeastsofpriv-
ate equity are becoming even bigger. They havelargefixedcosts—
all those in-house rainmakers, lawyers, analystsandconsultants.
With so much capital yet to draw from theirpension-fundpart-
ners, the pressure to do deals that might oncehavebeenshunned
has increased.
Investors need to be cautious. “Focus
and selection are very important” in priv-
ate markets, says Jo Taylor, ceoof the otpp.
His fund is big enough, with C$200bn
($150bn) under management, to do its own
buy-outs. This gives it a big advantage in
choosing good managers as well as deals.
In general bigger schemes also have more
muscle in fee negotiations. The surest way
to irritate a private-equity boss is to say the
curse words “two-and-twenty”, which wasoncea commonfeear-
rangement for “alternative” asset managers,meaninga 2%annual
fee and 20% of the profits. Private-equity bigwigsclaimthatsuch
large fees are vanishingly rare. Big clientscanusuallynegotiate
lower charges by, for instance, taking a directstakeinanacquired
business (a so-called “co-investment”). A typicalmanagementfee
is “in the low- to mid-ones plus free co-investments”,saysa priv-
ate-equity boss. And, he insists, the 20% performancefeeispaid
only once returns have cleared a hurdle rate.
Fat fees, outperforming funds, happy clients:fromtheperspec-
tive of asset managers that invest in publicequitiesthebuy-out
business looks too good to be true. “Hope-and-prayassets,”sneers
one. But hope springs eternal in all parts oftheasset-management
business. A lot of it now rests on China. 7A rock and a hard place
Market capitalisation, January 1st 2014=100Source:Refinitiv
Datastream*ApolloGlobalManagement,Blackstone,CarlyleGroupandKKR †AffiliatedManagers,
AllianceBernstein,EatonVance,FranklinResources,Invesco,LeggMasonandT. RowePrice250200150100500
2014 15 16 17 18 19 20Private-equityfirms*Otherassetmanagers†BlackRockOver the long
haul, the best
private-equity
funds do
really wellA
sset managementis mostly a rich-world affair. North Amer-
ica, Europe, Australia and Japan between them account for
around three-quarters of assets under professional management.
The United States is far and away the single most important mar-
ket. America sets the tone for capital markets everywhere else. Glo-
bal trading starts when New York opens.
Yet just as London gave way to New York after economic su-
premacy passed from Britain to America, so it is not hard to imag-
ine a future when the global trading day will begin in Shanghai.
China already has the world’s second-largest economy. Its heft in
global finance lags, but it is putting much effort into catching up. It
has opened its mainland markets to foreign investors in shares
and bonds. It is relaxing regulations to allow foreign asset manag-
ers to operate more freely. Asset management is growing faster in
Asia than in the West. The industry’s balance of power is shifting
inexorably. Time, size and momentum are on China’s side.
What is not clear is precisely how asset management will devel-
op in China. No asset manager can offer a global service unless it
has a footprint in China and across Asia. If you are selling Chinese
equity or bond mutual funds to Western investors, you need peo-
ple on the ground in China. The same business logic applies to sell-
ing global assets to Chinese investors, once outgoing capital con-
trols are relaxed. The big prize—and the big unknown—is “local to
local” ie, selling Chinese mutual funds to Chinese investors. And
the competition for this prize looks wide open.
China’s financial markets are immature. Much household
wealth is on deposit in banks or tied up in homes. The commonest
kinds of pooled investments resemble bank deposits: either mon-
ey-market funds or “wealth-management products”, higher-yield-
ing alternatives to bank deposits, which have a fixed term of a few
months but are often used to finance long-term property projects.
Stockmarket trading is dominated by retail investors, who trade di-
rectly in individual shares via brokerages. Only around a tenth of
listed shares are owned through domestic mutual funds.
China’s stockmarket has a very high churn rate. But the market
is becoming more institutionalised. Mostly this reflects buying by
foreigners, following the inclusion of a selection of shares and
bonds listed on China’s mainland markets in the benchmark indi-
ces compiled by msciand Bloomberg Barclays. The hope is that
China’s domestic market will also come under the stabilising sway
of asset managers.
If it does, it is an enticing fee pool. As China gets richer, house-
holds are likely to change their mix of wealth: less in bank deposits
and wealth-management products (which regulators are keen to
kill off for reasons of financial stability); more in traded securities,
such as shares and bonds. More of those securities, it is hoped, will
be held in diversified mutual funds, managed by professionals for
a fee. Pension funds will mushroom. gdpis likely to continue to
grow faster than in rich countries. A bigger economy implies more
savings to be deployed—and more securities to be issued, by both
companies and the government.
In short, managed assets will continue to grow faster in China.
For active asset managers, it is a dream. Their concern is that fee
revenue in America and Europe is diminishing, or at least cannot
grow much further. China offers a new frontier. “These are very bigThe Shanghai Open
The future of finance is Chinese. But what will it look like?China