Banking & Finance

CreditEase sees ‘angel fund of funds’ as more transparent way to invest seed capital

The wealth management unit of US-listed online financial services firm has invested in five general partners of angel funds since its launch in April

PUBLISHED : Sunday, 03 December, 2017, 6:01pm
UPDATED : Sunday, 03 December, 2017, 11:49pm

Borrowing lessons from now-defunct peer to peer operator Ezubao, which engineered China’s biggest Ponzi scheme after its founder used a fraudulent online investment scheme in 2015 to fleece investors, managers of China’s private equity sector now see fund of funds (FOFs) as the antidote that could combat scammers that have also tainted the sector.

Cally Liao, managing partner of FOFs at CreditEase’s wealth management unit, said FOFs bring more discipline and transparency to private equity and venture capital investments – a much-needed advantage that investors of seed capital into early-stage start-ups can benefit from.

Fund of funds is an investment strategy in which a fund invests in other types of funds instead of investing directly in bonds, stocks and, in the case of private equity, into a company’s unlisted equity.

Providers of FOF often tout the benefit of diversification and more stringent risk management and due diligence process of the managers that they invest in through their FOF platform.

In April, the company launched its first angel FOFs in collaboration with IDG Capital, a venture capital firm.

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Liao said the move also underlines CreditEase’s diversified approach towards its FOFs business. With 20 billion yuan (US$3 billion) funds under management for its entire FOF business, it wants to offer investors a range of alternative investment strategies ranging from venture capital, private equity, and now, angel FOFs.

“FOFs definitely injects more discipline to the fund industry,” said Liao.

With an angel FOFs, CreditEase invests in other general managers that run angel funds, which provide seed capital to their portfolio of start-ups and entrepreneurs. IDG Capital provides its experience in selecting the entrepreneurs seeking such angel investors, tapping on its experience in directly investing in Chinese tech companies.

FOFs definitely injects more discipline to the fund industry
Cally Liao, managing partner of FOFs at CreditEase

Since its launch in April it has invested in five such general partners of angel funds, with 500 million yuan assets under management.

Currently, these general partners were investing in the technology, health care, media, entertainment and environmental technology sectors. Apart from more transparency, Liao also said that investing in these angel funds through a FOF structure also allows more professional investors with smaller ticket size per investment to participate.

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“Many of the top-tier general partners [running angel funds] do not lack investors’ capital. Often their funds are oversubscribed. Using an angel FOF we can now invest into these managers,” said Liao.

In China, there are slightly over 300 fund of funds with capital disclosed at 1.6 trillion yuan, industry players said at a recent private equity forum held in Beijing.

Although illegal fundraising in the private equity and venture capital sector has not yet appeared to amount to the scale of the online investment scam run by Ezubao, which caused losses of US$7.6 billion, many executives say illegal fundraising still weighs on the private equity industry’s healthy development. They see FOFs as a useful safeguard against managers who raise funds using fake investment schemes. However, management fees related with FOFs are also higher than investing in a single private equity fund.