In recent years, the private investment fund industry in China has witnessed a booming development with the continuously regular supervision, improvement of transparency and investor protection. By the end of June 2019, the Asset Management Association of China (hereinafter the “Association”) has registered 24, 304 private fund managers and 77, 722 private funds, with a total fund size of 13.28 trillion Yuan.
Due to their professional management ability and relatively high investment returns, private funds have attracted a large number of institutional investors and high-networth individual investors who meet the standards of qualified investors. However, as China’s private fund industry is still in the developing and exploring stage, the management ability and professional ethics of private fund managers in the market are uneven. Once investors have subscribed the products issued by these managers with unqualified professional ability and ethics, their rights and interests are likely to be damaged.
In addition, as the regulation tends to be stricter, the supervision department eliminate the stock fund managers that do not meet the requirements of the new regulatory environment by means of frequent self-inspection and publicly announcing the cancellation, so as to achieve the survival of the fittest managers. Once the managers whose products were subscribed by investors are cancelled, the overall investment planning of these investors will be affected. Therefore, how to choose professional managers with good faith who are suitable for their own investment preferences has become a topic of concern to many investors.
1. Choosing a manager is the starting point of the protection of investors’ rights and interests
The cases that involve absence of professional ethics and irregular internal management of managers have appeared early in 2017. In April 2017, the Beijing Securities Bureau made a punishment decision that Shengshi Investment Fund Management (Beijing) Co., Ltd. was ordered to correct, warned and fined for misappropriating private fund assets and other matters. It was found that the total assets embezzled by this company was up to 7,003,858.27 Yuan, and some of the funds were transferred to the bank accounts of the company executives and employees for personal use, and some was directly used to pay the rent of the private fund manager. The case above made many investors greatly surprised. They had thought that the security of their investment capital would be relatively guaranteed while the investment risk should be assumed after the capital entered the private fund. But the truth was the private fund property, which should be independent and separate from the manager’s property, was arbitrarily controlled by the manager. It follows that the selection of private fund manager is indeed the starting point of investor rights protection. Once this step goes wrong, the protection of investor rights will be out of the question.
2. How to select a private fund manager
Now that it is so important to choose reliable and suitable managers, what are the key points of choosing managers? The author thinks the main points are as follows:
2.1 The adaptability of managers to investor’s own investment and risk preferences
Although the investors of private fund meet the standards of qualified investors, different types of investors are bound to have different risk preferences, risk tolerance and investment expectations due to differences in their asset status, professional knowledge background, and risk judgment ability. At the same time, in addition to obtaining cash income through equity investment, investors sometimes hope to achieve other intentions such as resource integration, discovery of potential customer and government guidance.
Therefore, investors should make an overall assessment and orientation of their own development mode, strategy, investment preference and risk tolerance ability in the face of macroeconomic cyclical fluctuations, and select managers suitable for their own business development and planning.
2.2 The business team circumstance of the manager
The investment team can be the concentrate embodiment of the manager’s investments and operation ability, and therefore becomes the core of the investor’s consideration factor. Generally speaking, the professional ability, composition and stability of the team members directly affect the decision-making power and resource allocation ability of the investment team.
Generally top investment professionals have rich working experience in top investment banks, consulting firms, law firms, accounting firms and real industries, and play an important role in the whole process of project selection, analysis and operation with their rich skills and experiences. Moreover, a diverse and complementary team often means that the team has a higher overall perspective and can coordinate and mobilize more resources of different areas.
2.3 Internal governance of the manager
The first element of governance that investors need to pay attention to is the equity structure of the manager. They need to determine whether the equity structure of the manager is clear, whether there is a clear actual controller, whether it is easy to give rise to corporate deadlock, and so on. Some managers actively give a certain proportion of equity to the fund management team and establish the equity incentive mechanism in order to improve the overall operation efficiency of the fund.In addition, the consideration towards management structure of the manager should be comprehensively analyzed in combination with its management systems, decisionmaking mechanism, benefit distribution mechanism and other specific factors, so as to seek the optimal mode matching with other collaborative systems. Specifically speaking, it is necessary to focus on whether the existing governance structure of the manager can integrate and utilize human resources, industrial resources, government resources as well as other resources and transform into strong and stable investment capacity, whether it can match with the core team, and whether it is conducive to the overall stability of the manager.
2.4 Historical performance
Compared with these points above, investors usually pay more attention to the manager’s historical performance. Although past performance can be used as a reference for assessing the manager's professional ability and future development, investors also need to reasonably consider the deep reason for the excellent performance of the manager (for example, whether the team performance is intensively made by a few core members, or whether the manager was established earlier and has the first mover advantage, etc.), and confirm that whether the reasons or factors behind the excellent performance of the manager still exist. Meanwhile, investors need to penetrate the historical performance materials provided by the manager for publicity and fundraising, judge and identify the core competitive advantages and disadvantages of the manager avoiding being misled by the “glorious history”.
Furthermore, while attaching importance to the successful historical performance of the manager, it is also necessary to focus on failure cases, which can better reflect the potential risks, defects and obstacles of the manager in project operation and risk management. Investors should pay enough attention to the causes of the failure cases, the rectification and status quo of the team and its members who are mainly responsible for the failure, and the number and proportion of the failure cases.
To sum up, qualified investors are advised to make prudent choices of managers in accordance with the above key points before investing in their preferred private fund. And investors can entrust professional intermediaries to do the due diligence and learn about the manager’s information as much as possible to protect their own rights and interests before making large investments. On one hand, investors should choose the manager with excellent historical achievements, high success rate of investment and outstanding reputation in the industry. On the other hand, investors need to lay emphasis on the adaptability between the manager and themselves, and ensure that the selected manager can adapt to their actual needs, risk preferences and tolerance capacity in investment strategy, fields of investment, investment style and other aspects.