From private banks seeking to communicate with China’s ultra-high-net-worth individuals (UNHW), to US cities and states seeking outbound Chinese investment, communicating with financial stakeholders in China has never been more important.
Global hedge funds are one fascinating example of how the future of financial PR in China is rapidly changing. With the door to China’s capital markets now slightly opened (and only very slightly) to a handful of the world’s largest hedge funds, these funds will now be looking to strategic communications to define their brand, strategy and leadership to Chinese institutional investors.
Whenever I speak to a global private equity firm about their China communications challenges, the word "differentiation" is oft-repeated. There is competition for capital and hedge funds, like many other financial institutions, seeking to differentiate themselves in China. Financial communications leverages the tools of PR to tell stories to financial stakeholders and to shift perceptions.
Previously, hedge funds and private equity employed a kind of mysterious "black box strategy," whereby the actual investment strategy remained unclear to the fund Limited Partners (LPs) (Limited Partners invest money into the fund while the General Partners (GPs) manage the fund and make the investments.) That era is indeed over as LPs seek transparency and accountability. Investors in both hedge funds and private equity funds want to know more about the leadership team, the strategy and process. They want to know the "how" and not just see the end results.
Up until a few months ago, some of these large hedge funds (most are in New York City, Greenwich, Connecticut or London, UK) had no access to funds from Chinese institutional or UNHW investors (for fundraising). This is because there are guidelines in place in China for outbound investment and capital flows. Additionally, there are concerns about hedge funds and their perceived riskiness. While there are many different types of fund investment vehicles within mainland China itself, up until a few months ago, a New York hedge fund, for example, would have no "access" to fundraising from China.
So what’s changed?
Shanghai’s Qualified Domestic Limited Partner (QDLP) program – introduced in 2013 – is a game-changer. With the QDLP program, China recently granted six foreign hedge funds quotas to raise RMB in China and invest it abroad (outside of China). The quota opens up China to the global hedge fund industry – in a small yet symbolic way. Six global hedge funds were granted a QDLP license: Man Group Plc, Winton Capital Management, Oak Tree, Citadel, Och-Ziff Capital Management Group LLC and Canyon Partners. Each firm has been granted a quota to raise USD$ 50 million for outbound investment.
These six hedge funds will now need to establish a brand profile in China, where one currently doesn’t exist, to communicate to investors, raise awareness and build trust.
As of June 2014, only Citadel has announced that they have completed their QDLP fundraising, although it’s unclear if Citadel has raised the maximum USD$50 million.
While in the early stages, many insiders expect the QDLP program to open up more broadly in the future, allowing more global hedge funds to raise even greater amounts in RMB. With this, an entire hedge fund ecosystem will develop in China. Hedge funds with famous names need to walk a delicate line in China: in China, they may have "zero" brand awareness and yet they need to build a brand and inform Chinese investors about "why" they are so successful overseas. Again, it’s a fine line: these funds need to essentially start over from a communications perspective in China and they shouldn’t rely on their overseas prestige – and yet, they do need to educate, communicate and somehow relay to their audiences in China why they indeed so prestigious and top-tier overseas. "The biggest question is how do you build a brand with an audience who isn’t aware of your brand," said Laurie Pinto, CEO of North Square Blue Oak, a London-based investment bank that focuses on China, in a recent phone conversation.
For hedge funds, the potential investor pool in China is limited in quantity. These investors need to be qualified ultra-high-net-worth individuals or a select group of institutions. Therefore, communicating to this audience needs to be tailored – and not mass market. More is not necessarily better. The key is really drilling down and finding the decision-makers and leveraging media, speaking platforms, executive equity and other stakeholder engagement to shift perceptions and to define a brand.
Kenny Li, CEO of KKM Capital in Shanghai agrees. In a recent phone conversation, Kenny told me that "no one (hedge fund) is doing enough to educate China's investors." Kenny has been working with Shanghai’s Hongkou District Government to create China’s first hedge fund office park. "For the next 18 months, it will be PR, PR, PR for global hedge funds in China. Then, they can try to localize, fundraise and even set up funds within China," Li said.
Li Haitao is an Associate Dean and Distinguished Chair Professor of Finance at the Cheung Kong Graduate School of Business (CKGSB) in Beijing. I spoke with Professor Li (who also serves as an advisor to global hedge funds) about the challenges and opportunities for building a brand and differentiating in China.
Professor Li believes that hedge funds need to "play off" the aura of exclusivity to appeal in China. Hedge funds are a "very niche product, very exclusive, very elite. Investing in hedge funds is a status…it’s a very selective club, the fact that we approach you means that you’re successful." The key, he says, is about "getting in front of the right target in China and providing them with education, not in an arrogant way but in a humble way… It’s not going to happen overnight."
Hedge fund education is essential and will indeed take time. Key to this will be meetings with regulatory officials and also more public-facing speeches at forums. Leveraging the media to educate about the sector will also be of great value.
In conclusion, it’s apparent that a couple of the global hedge funds are more PR savvy than others in China. They have clearly defined their brand, their messages and are telling their story consistently through media engagement, stakeholder relations, and conferences Those that have been holding back are cautious and watching how active PR benefits their competitors. Regardless of the approach, most would agree that China represents a "massive opportunity" for global hedge funds in China.
Adam J. Steinberg is the head of the China Financial Communications practice for Weber Shandwick in Beijing and the China Chapter Director for The Hedge Fund Association