Since the pandemic outbreak, waves of crisis have struck a wide range of domestic industries such as real estate, bonds and consumer finance as mounting complexity in the financial arena continues to shake up the asset management business.
How is it best to cope with new risks arising from the popularisation of asset management, design risk-averting transaction structures, and protect the interests of financial consumers against threats posed by fintech? These are some of the key puzzles that enterprises and law practitioners must now solve to transform challenges into opportunities in these times of uncertainty.
Rationality and opportunity
The downward spiral of the real estate industry along with regulatory pressures have caught many asset management players in a dilemma, forced into sombre self-reflection while striving to find new resolutions and ways to expand.
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In times of retrospection, one often finds that past transaction structures designed for compliance and mitigation of legal risks are not permanent, and the security and reliability of “debt disguised as equity” must be re-evaluated.
Questions such as whether the foundation of the transaction can withstand extreme risks such as insolvency, and whether transaction arrangements and credit enhancement measures are in line with requirements under the Civil Code and its interpretations, are some of the core issues that must now be resolved for a deal to proceed.
The adage “a house is for living in, not for speculation” as an idea has been deeply etched into the collective asset management mindset, guiding all investment and financing in the real estate sector. A series of new real estate investment and financing plans including asset due diligence, risk-mitigating clauses such as capital exit, tax treatment, debt transfer and takeover arrangements, along with reviews of basic business logic, will transform the business from “simple exploration of transaction models” to “management of consistency and stability”.
In light of a new round of mergers and acquisitions in the real estate sector, attention must be paid to the combination of alternative dispute resolution with litigation, authenticity of the underlying transaction, and rational design and innovation of transaction products.
Shifting transaction structures
From public ownership to guidance by government financing platforms, attempts at mixed ownership, and ultimately today’s public REITs, infrastructure investment and financing has been indispensable to both national welfare and people’s livelihoods. After multiple derivations and internalisation of imported ideas, a growing diversity of transaction models has manifested in this area.
In the urban renewal and infrastructure construction industries, the market is shifting focus to transaction structures such as the introduction of social capital, financing plus engineering procurement construction (F+EPC), establishment of fund, investor plus EPC, and authorise-build-operate (ABO). Only with compliance as a premise can a new type of transaction cater to the long-term needs of investment and financing in the field of infrastructure.
Empowering fintech
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Merits & Tree Law Offices
Fintech has stepped up as an important means of financial empowerment during the pandemic. Certain leading financial institutions have begun to uphold fintech as key in their strategic development, to be implemented across all departments.
Fintech will be applied throughout product design, support, promotion, operation and medium-and-later period management, aiming to forge a “product-customer, attraction-maintenance” full chain ecosystem.
As fintech continues to infiltrate all transaction scenarios, impacting information security and data compliance concerns, the supervision of fintech, either externally or internally, will inevitably become a dominant topic in the future of asset management.
Trust company innovation
A new player, the trust company, has entered the scene of standardised products and securities investment. Although trust companies have a long way to go in terms of human resources reserve and infrastructural construction, their undeniably innovative ways of expanding client base – and string of new ideas catering to such market demands – nevertheless make them a considerable force to be reckoned with. The so-called “catfish effect” of the emergence of trust companies continues to drive mutually beneficial co-operation within the industry.
Inclusive finance
Scarcity of high-quality assets and clients has been the bane of many operators in the asset management business. However, the recent crisis has proved favourable to some players experiencing a surge in client loyalty by safeguarding the interests of financial consumers from all angles, in spite of limited resources. Optimisation of consumer experience along the industrial chain creates a deeper level of bonding, bolstering certain asset management institutions to become industry leaders.
Shedding past forms of simple and traditional loan-type consumer products, inclusive finance has grown into a key tool in aspiring to realise the goal of common prosperity. Asset management institutions are striving to find the most expedient and safe way to allocate assets for the public good, while also effectively protecting the interests of financial consumers. Only then can we embrace an asset management landscape where everybody wins.
Long Haitao and Li Kailun are partners at Merits & Tree Law Offices
Merits & Tree Law Offices
5/F, Raffles City Beijing Office Tower
No.1 Dongzhimen South Street
Dongcheng District, Beijing 100007, China
Tel: +86 21 52533501
E-mail: haitao.long@meritsandtree.com
