Chinese family offices face greater scrutiny

Delegates at the HKVCA’s China Private Equity Summit on Tuesday heard that being an APAC or China-based investor was no longer necessarily a boon when accessing overseas investment opportunities.

Some Chinese family offices are facing a cooler reception from US GPs amid rising tensions between the two nations.

Speaking in a family office panel at the Hong Kong Venture Capital and Private Equity Association’s China Private Equity Summit on Tuesday, Mattan Lurie, portfolio manager at VenturesLab, said geopolitical tensions were impacting the ability to access new investment opportunities. VenturesLab is an investment platform for China-based angel investors in early-stage companies and venture capital funds.

HKVCA Private Equity Summit 2023

“It’s an issue both from the underlying portfolio companies and it’s also when we talk to funds,” said Lurie. “Hong Kong is now on the sensitive list and within some of the healthcare and synthetic biology companies in which we bring investment, they definitely are shying away.”

The growing tension between the US and China has reportedly prompted some US venture firms that have backed Chinese companies to begin distancing themselves from the market. “NEA, a VC firm whose Chinese investments date back two decades and include TikTok parent ByteDance, hasn’t made a new investment in China since 2021, according to a person with direct knowledge of the matter,” The Information reported last week. “And DCM, a U.S. VC firm with a focus on Chinese tech, has discussed giving its limited partners more say over their exposure to Chinese start-ups, according to a second person.”

China-based LPs exploring US opportunities may be subjected to regulatory oversight and scrutiny such as the Committee on Foreign Investment in the United States, which assesses potential national security risks associated with overseas investors. As a result, some family offices have adopted a multi-family model to dilute the sensitivity.

“It’s also a challenge because as a relatively small and unknown investor, before we might have been able to use Asia, or China specifically, as an angle to try to get into opportunities,” Lurie said.

Rising appetites for overseas investments from Chinese family office could be driven by ongoing regulatory and economic uncertainty at home.

Speaking on Tuesday’s HKVCA family office panel, Justin Chan, managing partner of China-focused private equity advisory LQ Pacific Partners, said the firm is taking a wait-and-see approach as the country recovers. LQP Group is a subsidiary of angel investment fund Decent Capital, which was founded by Jason Zeng, one of the five co-founders of Tencent Holdings, and acts as a trading platform for unlisted shares.

“I think the honest view right now is that we are taking a very cautious approach as China comes out of the covid lockdown,” Chan said. “We are seeing the numbers coming back from an economic level, but I think the capital markets are still warming up, I think all the way till the end of 2023.”

Others are more sanguine about navigating China uncertainty. “Clearly the policymakers in China are always very clear: every five years, 10 years, they give you a very clear roadmap,” Anthony Chan, chief executive of family office platform Isola Capital, told HKVCA delegates.

“[Policymakers say] ‘These are the industry pillars that we want to focus on,’ so it’s not that difficult,” Isola’s Chan added. “Where it’s difficult is having the people on the ground with the relevant talent and skill set to tackle those pillars and to be able to strategically execute. Because at the end of the day, especially for privates, it’s not getting into the deal, it’s getting out of the deal.”

In March, Hong Kong set out a list of measures luring the ultra-wealthy to set up family offices in the Special Administrative Region, including tax concessions. Speaking on Tuesday’s panel, Christine Ho, deputy global head of family office at Invest Hong Kong, said family offices based in Hong Kong managed a total of $281 billion as of 2021.

APAC family offices share strong appetites for overseas investments, particularly in developed markets such as Europe and the US. Some families with core businesses in Asia may diversify into overseas markets to avoid concentration risks or due to these regions boasting more unified regulatory frameworks. Regulatory risks in China may also prompt domestic family office investors to seek opportunities in areas such as tech overseas.

Additional reporting by Lawrence Aragon