China’s Ultrawealthy Catch the Family Office Bug
WHY YOU SHOULD CARE
Because this closed-off investing model is taking over the world.
By Henny Sender
At Alibaba’s lavish 20th birthday party in September in Hangzhou, the e-commerce group’s founder Jack Ma took to the stage in rock star garb to perform “You Raise Me Up.”
The show for a crowd of thousands was a swan song for the 55-year-old, marking his retirement from the $450 billion company.
After the stadium gig, Ma will stick to smaller venues. Like many other members of China’s tech tycoon class, that includes a family office, the opaque investment vehicles that collectively make up one of the largest pools of wealth on the planet.
Blue Pool Capital, formed in 2015 after Alibaba went public in New York, holds a portion of the Ma family’s $40 billion fortune, as well as much of the $10 billion wealth of his right-hand man, Joe Tsai.
In a flurry of investments last year, Blue Pool invested in FogPharma, which aims to find trailblazing medicines that “drug the undruggable,” and Rent the Runway, a subscription service for designer clothes.
But it was Tsai’s purchase of the U.S. basketball team, the Brooklyn Nets, that put Blue Pool on the map. The $2.3 billion deal, made through Blue Pool, made it the biggest U.S. sports team deal in history. Tsai was approved by the National Basketball Association as the principal owner last month.
Blue Pool is the largest family office of any of the tycoons. “Nobody else comes close to Joe,” according to one of the country’s most successful venture capitalists.
In setting up the office, Tsai relied on talent scouted from an older family office. In the 1990s, when he worked at the Swedish Wallenberg family’s vehicle Investor AB, he met Alexander West, with whom he went on to create Blue Pool.
Often, the family offices have even closer family connections. Jack Ma’s wife Kathy is involved in several of Ma’s pools of money, including his personal private equity fund Yunfeng Capital, said several managers who have received checks from the Ma family.
There are some similarities with the world of U.S. private equity, where first-generation buyout billionaires have been setting up family offices for years. The ties between China’s tech billionaires and their money managers echo those between San Francisco-based Iconiq Capital and its clients, who include Facebook’s Mark Zuckerberg and Sheryl Sandberg. Iconiq has invested in companies including Uber and software app Restaurant365.
But Chinese tech tycoons have their own particular investing style and investment targets. The purpose of a family office is to preserve and pass down wealth, which typically requires diversification. But the instincts of this new breed are to reinforce both their own empires and their competitors’ empires, adding to the small group of individuals’ dominance of a huge slice of the Chinese economy.
Singapore-based Insignia Ventures draws a fifth of its funding from 55 mostly Chinese tech founders, including delivery giant Meituan’s Xing Wang. Insignia founder Yinglan Tan describes his firm as a “unicorn club.”
“They represent 20 percent of my capital but 80 percent of my ideas,” he said. “They help me source deals — I invest in companies they refer to me.”
Tan is part of the network, seen by clients not as an arms-length professional but as one of them. And his conversations with the entrepreneurs are not those of a typical money manager: “We don’t really talk about asset allocation or portfolio measurement.”
His experience is far from unique. Two years ago Jason Tan quit his job running the Asian operation of hedge fund Tiger Global and took stakes in a selection of Chinese tech companies.
He is now chief investment officer of Jeneration Capital, managing money for the founders he backed at Tiger, including some of the principals at car-booking group Didi Chuxing.
In soliciting money, these managers must be attuned to competing alliances and loyalties. Another Singapore-based venture investor manages money on behalf of Tencent while — very quietly — doing the same for the Alibaba Entrepreneurs Fund.
But the new breed of close-knit family offices faces a challenge in breaking with precedent. A Chinese saying holds that wealth does not last three generations — and a study by Chinese University of Hong Kong professor Joseph Fan found Asian family businesses transferred from founders to heirs between 1985 and 2007 lost an average of 60 percent of their value.
“The castle usually crumbles from within,” said Gao Hao of the Global Family Business Research Center at Tsinghua University in Beijing, noting that new investments with family money seldom succeed. “They never exceed the value of the original business.”
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