ISSUE 18: Rich Chinese Go Global!

2023 is dead. Long live 2024!

A few Chinese companies, many Chinese government delegations and a lot of HNWIs

Reflecting on 2023 one of the interesting aspects was the number of Ultra High Net Worth Individuals (HNWIs) Chinese running around Europe and the Middle East.

In 2023 there was only a handful of Chinese corporate visitors looking for acquisition opportunities in London. There was in the latter part of the year quite a few Chinese government delegations (such as Shanghai, Shenzhen, Wuxi, Hainan … to name a few). However, there was an absolute herd of Chinese HNWIs checking out Europe (and in particular London and Switzerland). In the last three months of 2023 alone, we had meetings with 24 Chinese USD billionaires. They were all very down to earth and friendly. We did some preliminary work for a number of these rich Chinese HNWIs but I hesitate to call them clients as they never pay. It is a mystery of the very rich that they somehow believe they should not pay for anything.

Once the agent of a truly world-famous sportsman reached out to us in China to see if we have interest in acting as lawyers for his client in China (i.e. sponsorship deals etc.). We sent over an introduction and our hourly rates. The agent wrote back confused as to why we sent him the hourly rates. He had assumed we would work for free for his client. When I asked him what would be in it for us, he advised “you can tell people you work for him”. I thanked him for his interest but advised that our business model would not allow us to pursue this opportunity further.

So why are the Chinese HNWIs running around the world?

The name of the game for almost all of them is diversification of wealth – that is to have some of their fortune safely located outside China. This may be due in part to geo-political concerns but overwhelmingly it seemed to be due to a change in perception by the super wealthy Chinese that they no longer consider China to be a place that guarantees outsized returns.

They also do realize that you do not need to live where your money does. Initially, many were interested in Singapore but even for billionaires it seems expensive with 65% stamp duty on real estate and tight requirements on residency. Also there has been a clampdown on money transfers to Singapore.

Although it does not seem like much of a diversification Hong Kong does seem to be staging something of a comeback. The HNWIs gave good feedback on the level of advisory expertise in Hong Kong.

The Middle East is on a great upswing but whether there is the advisory expertise to compete with Hong Kong much less London or Zurich remains to be seen.

How did they make their money?

The vast majority of the HNWIs we met in London were what one would call “China old money” (i.e. only 20 years or so). Almost all of them made most of their money in real estate. Many had conglomerate operations but if you dug deep enough you would find that at the base the fortune was likely to have been built upon real estate.

What do they want?

To varying degrees, they all wanted to invest some of their fortune outside of China. Some were happy to have a small percentage – some would have accepted a 50% discount on their assets if they could get the money offshore.

However, all were consigned to or possibly happy to continue to live in China as their primary base. Europe and the Middle East are nice to visit but if you are in your 50s or 60s there is no place like home. Also most had the problem that they felt they had to continue to run the family business. Their children had studied around the world at elite institutions but seem unlikely that many would follow in their parent’s footsteps to run the whole shebang. One takeaway from the recent meeting was that Chinese private companies will need to recruit professional managers to run their family-owned businesses even more than is the case for European or USA counterparts – the kids seem to have little interest in running the family business. In some cases, one child was working in the business in China, but the others were living outside China.

Interestingly, almost everyone we met was highly motivated to do … something! But it seemed that they did not have a network in Europe or the Middle East or even know who to trust or how to go about things.

The greatest single motivation for almost everyone (at least stated) was their children’s future. All had educated their children in an Anglo-Saxon nation (either UK, Australia or USA). USA seemed to be less interesting due to both geo-political concerns but also the possibility of being shot.

It was interesting how multi-billionaires were desperate to get their offspring into an internship with an investment bank. One would think such people would have the network or connections to make this happen with a click of their fingers. You would think so, but you would be wrong.

When it came to doing things – almost all of them were looking at real estate for personal use. However, in addition there was great interest in investing in Europe or the Middle East – hotels, tech, financial services, start-ups, Pre-IPO companies – but the problem was their network in these geographies was lacking.

The Chinese HNWIs also professed to be interested in how European high net worth families had dealt with generational wealth issues. Some European families were in their 7^th generation.

How did they recruit professional managers? How to defuse family disputes especially as over time there will be more family members? How to deal with new issues for the Chinese HNWIs such as philanthropy, investing in art and lifestyle choices? Perhaps most importantly how to hold the reins over the fortune from beyond the grave?

One problem was that some of the Chinese HNWIs wished to learn from European HNWIs but really, really wanted them to be like Chinese HNWIs. They wanted to meet European HNWIs who had themselves founded a large industrial business, were still running the business and could discuss doing deals together. The problem was that these European HNWIs are very rare. Most HNWI businesses have long been professionally managed. The family office deal with investments. Often the later generations of the family are kept a safe distance from the operational business – receiving a cheque while skiing in the Alps.

After much convincing that finding such people in Europe would be challenging the Chinese delegation of 20 people had a different request.

How about we visit the manor of a European HNWI? Ideally the manor should be located just outside of London as they were on a tight schedule. Also, it would be best if there was a museum about the family attached to the manor.

Accordingly, this plan required us finding someone that was a multi-billionaire, had a manor on the outskirts of London with a museum dedicated to the family business … and despite this would like nothing more than 20 total strangers turning up to check out how they live on a day of their choosing. Unfortunately, Batman/Bruce Wayne lives outside Gotham City not London – so we were unable to make this come true for the Chinese HNWIs.  

What are the problems/risks they face?

However, the Chinese HNWIs face more problems than not being able to meet Bruce Wayne when they want. Issues for them to contend with include:

Simple Bank things can be Difficult – things that you would think should be easy for the superrich can be super complicated offshore - opening a bank account, passing Know Your Customer (KYC) checks – all difficult – especially if most service providers do not really understand Chinese UHNWIs.

Communication – a leading private bank we met with in London told us that they had a dedicated China team – it was composed of a Malaysian, Hong Kongnese and a first generation British Chinese – none of the team really understood the PRC or mainland Chinese. To make things even more difficult the bank’s guidelines prohibit the use of WeChat. The bank kept nagging us for the billionaire’s email addresses but we just shrugged and said we do not have their email addresses and for all we know they may not even know their email addresses. What I do know is that if you do not use WeChat you will not be able to communicate with these Chinese HNWIs.

Trusting the Wrong People – there is a whole ecosystem of people keen to separate the superrich from some of their money. Much of the ecosystem comprises of Chinese people in Europe.

It reminds me of a documentary on migrants landing in Ellis Island in the 1940s. Poor migrants set off from Europe to the USA with all their wordly possessions in their suitcase. Upon arrival they were amazed and touched to be greeted from fellow countrymen waiting at the dock. These fellow countrymen were happy to see them and offered assistance in finding a place to stay or employment. They would offer them a lift into town and would pick up the exhausted migrant’s suitcase to ease the burden. And then that was often the last the migrant saw of his/her wordly possessions as the suitcase was thrown in the back of the car and their new friend drove off while waving to them.  

Similarly, there are fraudulent Chinese seeking to take advantage of the wealthy who are unfamiliar with Europe. They are a small minority – a possibly bigger danger is a group who advise on all manner of issues (tax, residency, real estate) but actually know nothing about these topics.   

In one case a wealthy Chinese had bought a London apartment for over £30 million (yes really) and thought the best thing to do was to get a Hong Kong lawyer to do the conveyancing (yes really). The Hong Kong lawyer had no idea about conveyancing in England, nor seemingly professional negligence. Therefore, when working on the deal he failed to do many of the things that people buying £30 million (or indeed £1 million) apartments would do to secure their interests. In any event after sitting on the deposit for 2 years the developer decided to get out of the contract with the Chinese buyer to sell to an even higher price to a new buyer. The Chinese buyer did not have the protections that even the most junior English conveyancing lawyer would have built in so the developer was able to return the deposit interest free and sell to a third party at a higher price.  

In another case a Chinese real estate buyer was approached by a consultant that said they could reclaim a large share of the stamp duty they paid on their house as they had carried out substantial renovation work. The consultant was so confident that they agreed to only be paid once the government would refund the stamp duty. This was a very impressive trick. Basically, in England you can claim that the house was in such a condition it was not habitable and therefore not classified as being residential. Upon making such claim the tax office will refund the stamp duty with no questions asked. However, they will in the fullness in time review the matter and when they see the house is indeed a house then the owner will not only be charged back the stamp duty that was repaid but also fines and penalty interest.

There are also cases where the HNWI really is just a little bit greedy and a bit too clever by half. A Chinese HNWI (estimated worth in excess of USD 5 billion) had recently purchased an apartment and was told he could reduce the stamp duty by claiming it was his first purchase of an apartment anywhere in the world. We pleaded with him to tell the truth and just pay the normal rate. He refused. We told him no one would believe that a man who bought a million £ apartment in Mayfair as his first real estate purchase in the world. He still refused. Then we just said we could not act with him if he did not tell the truth and he reluctantly agreed to pay the correct amount. The reason for being so insistent was not to boost tax revenues but I knew if there was a problem it would come back to haunt me.   

New Opportunity?

Meeting these Chinese HNWIs got me thinking there may be an new opportunity in helping them find a different type of target.

The following trends are impacting Chinese HNWIs: 1) Chinese HNWIs are extremely interested in diversifying their investments geographically beyond China; 2) European governments are becoming less open to majority Chinese investments in a wide range of sectors – European companies are also more skeptical in regards to having Chinese majority or outright investors – acquisitions below 10% without major changes to governance should not be problematic; 3) Chinese HNWIs are often very familiar with European hidden champions; 4) due to high interest rates even high quality European companies are facing something of a financial squeeze; 5) the track record of Chinese majority or outright acquisitions of European companies has been mixed … some have performed poorly … others a total disaster. Most Chinese acquisitions in Europe do fail and this is often due to management issues.  

A possible solution we are looking at is to pre-package some minority stakes in European hidden champions or pre-IPO companies. It would be possible to add in protections for the Chinese minority shareholder - potentially put option or guaranteed dividend – or a possible China angle (such as a technology license or strategic co-operation). Indeed, some European companies are looking to reduce their China exposure and therefore it may also be of interest to locate a Chinese partner that would take over all or part of such business.  

As such investment would be primarily a financial – and not disrupt governance structures – then it should be easier to negotiate such deals.

Provided the European target is relevant to the Chinese investor then it should be possible to obtain approval from the Chinese authorities to transfer the funds. These funds will then be cleared from a KYC perspective – as will the funds from any dividends earned or future disposal.

Anyway, we will see if any Chinese HNWIs will be looking for such opportunities in 2024! Would be delighted to hear offline from people interested in exploring such opportunities – especially from anyone that has worked out how to get the super rich to pay legal fees!

Happy 2024 and see you next month!