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A chat with… Kenny Lam, group president, Noah Holdings Limited

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Kenny Lam, Noah Holdings

NYSE-listed Noah Private Wealth management is the largest independent wealth manager in China, with almost 100,000 clients, each with an average net worth of US$30-50 million. Asian Private Banker sits down with Kenny Lam, group president of Noah Holdings, to discuss the firm’s strategy for the China onshore market.  

Kenny, 2015 was a good year for Noah.

Yes, in terms of scale of business, 2015 was a good year. We did around US$16 billion in new assets – US$ 1 billion came from our Hong Kong office, which grew more rapidly than our China [business] given the need for global diversification. At the same time, our China business grew around 30% last year and should maintain strong growth amidst global volatility. But we are also learning from mistakes we have made and are still trying to improve.  We are a small firm in many ways and in order for us to stay competitive with the established global players and leading banks in China, we have to stay focused and agile.

At 95,000 HNWIs, your client base is the biggest in China and almost twice the size of leading Chinese private banks. How have you gone about raising the firm’s profile?

Not simply by chest pounding, but by explaining our proposition to clients. If you asked me five years ago why clients should choose Noah, it would be difficult to answer because we didn’t have a global network. But now you see a lot of Chinese clients, when they go offshore, they come to us. A major reason for this is that our relationships are all onshore.

So imagine all these HNW clients who are now in second-tier cities, many of whom have businesses and are extremely wealthy but are not high profile. Many of these clients are covered by our physical network. That’s our strength. We cover around  67 cities with 135 branches and 1,100 relationship managers (RMs).

And your presence is concentrated in second and third-tier cities?

About 60% are in second and third-tier cities. We started in Shanghai, but we quickly moved south and west. We think that China’s wealth growth is driven by entrepreneurs, and for us to be a unique player against the big banks and globals, we need to start with the engine of the economy, which is entrepreneurs. The banks focus on their wealth management arms, because they have a selling machine. The problem is, the richer you are, the less you care about how nice the branch is and the more you care about the investment capabilities. Today, our average client is worth US$30-50 million, and he purchases three products a year, at US$1.5 million per transaction.

So we’re the largest private equity (PE) fund and real estate fund of funds in China. If you’re thinking about buying PE, there’s nowhere else to buy, because we are the exclusive distributor for leading global PE firms. The way we’ve been able to capture the market against the big [banks] is by treating our asset management business as the core engine. So if you look at our [WM] offices, they tend to be less opulent and lower profile, and not one of those ‘singing and dancing’ private banking wealth centres.

How do you identify and target prospective clients?

We start in each city the same way. There’s usually some business association that we can look at and say “what are the top 30 firms in that city”, and we start building from that point on.

So you cold call?

Our method is to explain our investment philosophy. If you look at our client numbers, they were flat for a long time, before growing substantially around 2012 due to word of mouth. So it’s not how well you sell, but how well your investments have performed.

When noone was talking about PE, we were telling investors about PE. After a three or four year period, when we started having some distribution (around 2011/2012), our clients started seeing some amazing returns from our investments. You don’t see any commercials or public advertisements. We try to be discreet.

Why did these global PE firms choose Noah to be their exclusive distributor?

I’ll use an example. One of these firms DD’d us for two years. I said to them at the time, “We’re a pretty small-capped firm, so why us and why not large bank?” They said, “Look, we need to first diversify into the HNW retail space, and where is the biggest space in the world? It’s China. And if you’re looking for a partner in China, you need to find a LP [limited partner] base that is educated, because these are not easy products.” Last year we put on 60-70 seminars, each attended by 300-400 clients. These are not to push product but to educate clients. We created an education unit about two years ago – the only one owned by a wealth manager that is licensed by the Education Bureau in China. Last year we trained 20,000 prospective and existing clients on WM. So when these guys saw us, they said, “Wow, we’ve never seen a firm spend so much time and resource on education.”

If you look at these big banks, they tend to be volume driven and very transactional. And so if you’re selling PE products – how do you explain to your client what a PE fund is, and that you must lock your money in for 7 years? You can’t do that on a typical bank platform. We think that super HNWIs will have a lot of allocation to PE hedge funds and real estate, and those investments need education as a starting point. You can’t just say “Buy this product, one million dollars, seven years, and come back later.”

What led to you to join Noah from McKinsey?

Three reasons. First, the culture is extremely values driven. Noah’s Chairman, Ms. Wang Jingbo is a devout Christian – hence the name Noah. The asset management firm is called Gopher – not after the rodent but after the type of wood that was used to construct Noah’s ark. Second, the team mix. Third, my view of the market. If you look at the whole private banking market globally, the biggest pie no doubt will be Asia. But there are two types of market: onshore and offshore. I think the offshore market is highly saturated, and is a small piece of the pie. The real money still sits onshore – in China, Taiwan and Indonesia. The problem with foreign banks is that they can’t build enough of a network. But it’s not just networking, it’s about product speed. Foreign banks’ compliance sits in Hong Kong and Zurich. Our compliance sits in Shanghai, so I know what risks to take and what risks not to take. Foreign banks have dominated the offshore market and they have great global expertise. But in the onshore market, domestic players may have more of an advantage.

Does your sheer size today make you more of a regulatory target or does it shelter you?

Currently the regulators treat us as a prime partner. I’ve seen the regulators more in the past two months than in the last year and a half. Why? We are one of the largest in wealth and asset management, and so they come and say to us, “We want to see what you’re doing.” We’ve been screened three times in the last twelve years to make sure we’re doing the right things in terms of sales, risk profiling etc. After that, they asked us to work with them to define certain standards in the market. There’s no private banking regulation in China – just securities and insurance regulation.

The story of Noah’s roots centres on the firm’s ability to exploit a loophole in domestic regulations, to gain first mover advantage, and to effectively force the regulator’s hand by getting yourself listed on the NYSE. How accurate is this?

I DD’d this firm a lot when I was at McKinsey. It’s indeed a grey area when this firm was started, because nobody was focusing on private banking in 2003. [Our endorsement by authorities] was not driven by our listing on the NYSE; it was much more about a surge in client acceptance between 2007 and 2010. Because we are not state-owned, clients were asking, “How can I give you more wallet share if you are not supported by a big state-owned and I can’t see your numbers because you’re not listed?” So we realised that in order to gain scale and trust in this space – and Sequoia Capital was behind this – we either needed to be part of a big bank or get listed in the most stringent market. And that’s why we didn’t pick NASDAQ – it had to be NYSE. After that, we got more attention, because we were the first firm listed. The regulators came in and said “Wow, you’ve created an industry (there are now about 130 firms like us in China, even though some are much smaller) and so you need to get a license.”

What was that license?

The CSRC (China Securities Regulatory Commission) came to us first, and told us to acquire a fund distribution license. A few years later, in 2012, we decided that we wanted to manage, so we got an asset management licence. We are now fully governed by CSRC. In Hong Kong, we were the first Chinese firm to be fully licensed with series 1, 4, 9, trust and insurance.

So you’re saying that it’s a misconception that Noah is operating in a regulatory ‘no man’s land’?

A lot of foreign banks’ perceptions about us are misguided. They could have said this about us six years ago, but if you knew the amount of times the regulators have visited us, there’s no way you could conclude that we’re operating in a ‘no man’s land’. Last year we sold US$16 billion of products – that’s more onshore than some leading banks were selling across Asia in one year – so there’s no way the regulators would say “Please go ahead in this no man’s land and continue operating.”

What impact have the recent Ponzi scheme revelations had on your business?

We consciously sold a smaller amount of fixed income products in the fourth quarter (2015) because we believed that a substantial proportion of the products being offered in the market as “fixed income” were, in fact, Ponzi-like schemes. These other WMs go on the market and say “Here’s a 13% product guaranteed for 5 years.” Of course they’re able to attract funds – but we’re not doing any of that. In the first quarter of this year, the regulators clamped down on a lot of those guys.

Does this competition worry you?

Our worry is much less about competition in general, and more about the market. The HNW take-up of private banking is very low in China. In China if you are rich, you put your money in a retail bank. The question is not for me is to compete with large private banks for clients that are already with a private bank. Our challenge is in convincing clients to put money in active investments. The one worry I have is this: in the early stages you have a lot of players coming in claiming to be wealth managers, and they are attracting less-educated clients who then get burned. This is going to disrupt the market, and you see this already now. The regulators are extremely tight on sales and risk profiling. The key about China is social stability, and if you have a lot of people getting burned by wealth managers, the only reaction from the regulators will be “shut it down”.

What will be the aftermath of this latest Ponzi scheme fiasco? Will investors have short memories?

I don’t think so. You see clients shifting in product mix. Before it was mostly about fairly active PE investments. Now it’s PE, fixed income and insurance. They’re even shifting assets out of China. Two years ago we were talking about a USD product that’s only single digit returning and nobody would listen. Now they come and say, “If it’s stable, high single digit, then fine.” Clients are starting to understand that they can’t be Warren Buffet everyday.

Is it difficult to do DD on WMPs?

We have product people at each of our branches in China, and these professionals actually go and look at the underlying assets. In 2015 we looked at 2000 products, and after DD and screening, only 151 were approved. This process it what you usually see at a global bank. For Noah, it’s the core, because otherwise, if you burn your client once, the trust is gone and it will be very hard to recover from that.

How do you manage your cost base?

Our margin has always been around 30-35%. Most of the cost is people – and half goes to the front line, which totals 1,100.

Where do you find your talent?

We get a lot of talent from major banks. I remember an institutional investor asked three of my top performing RMs why they would come to Noah from a major. Their response was that they find our platform deeper and products more unique, so they find it easier to talk to clients about asset allocation.

Once you reach bulge bracket status, oversight of your branches and RMs becomes a much more onerous task. How are you managing?

We’re experiencing this right now, managing 1,100 RMs in 67 cities. We are a lot more stringent. We have an audit team of 12 that goes around conducting spot checks, and a stringent compliance system where we publically name and shame any RM that breaches regulations.

Is there any concern that if Governor Zhou keeps his word and internationalises the RMB by 2020, and suddenly there’s real global asset allocation for domestic Chinese investors, you’ll find yourself competing with the likes of UBS and Morgan Stanley?

I think that they will come eventually – I don’t know when – but we never think that we can be the only leading firm in China. If you look at the US, as a mature wealth market, you have there a mix of firms. But I believe that there will be a few Chinese private wealth management firms that will become prominent globally. One of them could be Noah.

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