The "Midfield Crisis" of Private Equity Wealth Management

In China's vast private wealth management market, a wave of anxiety is spreading from mass customers to high-end clients.

What raises concerns is the increasingly elusive "stable income" products.

In the past, various private equity or wealth management products that were "lower risk and higher return" were the "trump cards" in the hands of client managers and the most attractive products in the channel mix.

They were "produced" by the "most reliable" or "most professional" teams, offering stable returns, high thresholds, and high professionalism, which garnered strong trust from clients.

However, now, with the continuous decline in deposit and bond market yields, such products have vanished from the entire wealth management market.

As stable income products have overall entered the "micro-profit (below 2%) era," and the guaranteed yield of insurance products has dropped below 3%, sales channels and VIP clients are finding it increasingly difficult to reach a consensus on product offerings.

A rare "mid-term crisis" is sweeping through the wealth management market.

The "New Expression" of Wealth Management Sales

Zhitang recently discovered a "strange" phenomenon at a well-known internet distribution channel.

Their wealth management products aimed at mid-to-high-end clients have begun to change their "sales pitch": instead of simply stating "expected yield of 2.5%" or "annual yield of 1.9%," they have transformed into "Yu'ebao +0.74%" and "Yu'ebao +1.31%." (as shown below)

The actual yields are only displayed after clicking into the specific page.

This arrangement turns the sales product into a "primary school math problem": Do you want to know the yield of the wealth management product? You first need to know the yield of Yu'ebao!

A "Last Resort"

Logically, such an arrangement does not conform to the recommendation rules of the wealth management market: no customer likes convoluted discounts; the more convoluted the pitch, the more complex the page, the more impatient the customer becomes, and the higher the dropout rate during the clicking process.

However, upon closer examination of the yields, one cannot help but empathize with the platform's "good intentions."

The yield for products specifically for mid-to-high-end clients is only 2.25% to 2.5%, a figure that is indeed difficult to showcase to attract clients directly.

With a minimum purchase amount of 300,000 for mid-to-high-end clients, after one year of product investment, the return would only be a little over 6,000 yuan, which cannot compare to the 20,000 or 30,000 yuan returns of previous years!

But this is already the "greatest sincerity" that the channel can offer. Observing deposit rates reveals that over the past three years, fixed deposit rates have continuously declined, with the three-year deposit rate dropping from 3.5% to around 1.3%, a decrease of 63%!

Thus, the distribution channel has changed its approach: since everyone knows Yu'ebao— the "national-level" money market fund—let's use it as a "benchmark."

It's like a sign hanging outside a restaurant: "Our beef noodles have one more ounce of meat than Lanzhou noodles!"

It seems like not much substantial information is conveyed, but the psychological suggestion is strong: it's a bit more delicious than that "everyone has tried."

The "Dilemma" of High Net Worth Individuals

If "Yu'ebao + 0.97%" is a psychological comfort for the general public in wealth management, then among higher-end clients, this "yield anxiety" is even more pronounced.

In the past, China's wealth management market was essentially "layered." When an investor's asset scale exceeds the threshold of 500,000 to 1 million yuan, and after a series of risk assessments, their available products significantly increase.

These include trusts, private equity, exclusive private placements, separate accounts, high-end wealth management insurance, and even more complex products like snowball and asset securitization. The combination of yield and risk volatility options was quite broad.

However, now in this market, the yields of all stable income products have sharply decreased, while products with slightly higher expected yields invariably come with greater volatility.

Products that were once "specially supplied" to high net worth clients are gradually showing a trend of converging with mass wealth management products, which puts high net worth clients in a difficult position.

To put it more vividly: the products that used to be both safe and profitable have diminished. Now, one can only echo the Wall Street adage:

Either earn more, or sleep better!

Where Have the "Perfect Products" Gone?

For high net worth clients, "two or three points of yield" are hardly enticing, but where have those "ideal products" and "perfect products" they loved gone? Why is there no supply?

The answer is simple: there are fewer "individuals" willing to pay a high price for fundraising.

Take the once-popular high-yield trust wealth management products as an example. More than a decade ago, many trust products had annualized yields of 8% to 10%.

The asset packages behind these trusts typically came from the real estate market, land reserve companies, or local financing platforms, and the yields of the latter two were also closely related to the heat of the real estate market. Such funding interest rates are certainly not visible now.

The driving force behind high-yield products is not limited to this. As the economy increasingly emphasizes technological innovation and efficient operations, the interest rates in the entire financing market are also being compressed, which has led to a decrease in the "spread" of fixed return financing businesses, naturally affecting the yields of related products.

Moreover, the aforementioned high net worth client group clearly has a broader perspective. They may be involved in real industries, invest in private equity, participate in quantitative hedging, or even engage in some cross-border allocations. The more options clients have, the fewer are likely to accept low-interest and low Sharpe ratio (risk-adjusted return) products.

It is no wonder that wealth management platforms adopt a high-end restaurant menu strategy:

When the chef knows that customers have already tasted all the delicacies, they need to change their promotional approach: "Our steak isn't the most expensive, but it's a bit more tender than that of five-star hotels."

What Are Investors' Options?

For investors (whether ordinary investors or the aforementioned high net worth client group), the current response seems to be—facing reality.

The likelihood of waiting for yields to rebound is clearly low; one must either accept products with a higher level of risk or accept lower-yield products and try to make concessions in scale and holding period to exchange for a bit of Yu'ebao + yield Or - simply go global with investments - but this may mean bearing more exchange rate risk.

If it is the former, there is now more supply in the industry. In recent years, many "fixed income +" products have emerged in the channels, which, after applying some quantitative and risk management measures, are expected to control volatility to some extent (but this actually only refers to lower volatility than fully invested risk assets).

If it is the latter, high-net-worth clients may have a lot of new knowledge to learn.

For mid-end investors, carefully observing the various public funds after fee reductions, as well as the newly emerging private wealth management products from various channels, may be a relatively rational choice.

Response from Management Institutions

For managers (private institutions, securities asset management, or small and medium-sized public institutions), facing the demands of investors, appropriately lowering fees may also be a strategy.

In fact, a type of "public fund-like fee" private placement (separate account products) has recently emerged in the market.

Taking the stable private wealth management products packaged as "securities asset management system" as an example, the fee structure of some products is increasingly resembling that of traditional "public funds."

Their outer shell is private placement: requiring qualified investor certification, with a minimum investment of 300,000 yuan; but the core is more like a "public fund dressed in private placement clothing."

Let's observe the prospectus of one of the securities system products (see image below):

Management fee 0.35%/year, custody fee 0.01%/year

No subscription fee, no redemption fee, no performance fee, all marked as 0%.

This has completely broken away from the traditional private placement logic of "2+20" (2% management fee + 20% performance commission), and in recent years, fixed income private placement products have continuously "retreated," reducing the performance commission ratio to 5%-10%.

This is somewhat like a Michelin restaurant suddenly launching a "light lunch set": the dishes are still exquisite, but the complicated plating and additional fees have been removed, leaving only the core flavors.

This is the reality of current low to medium risk private placement products: prices have become more affordable, profits have thinned, but at least they can attract customers.

However, problems arise: when yields drop and fees are reduced, investors will naturally ask: since it has become similar to public funds, why still buy private fixed income products?

This is actually the phrase that distribution institutions fear the most.