April 09, 2021 - 6:58pm EST by
2021 2022
Price: 42.83 EPS 0 0
Shares Out. (in M): 61 P/E 0 0
Market Cap (in $M): 2,600 P/FCF 0 0
Net Debt (in $M): -1,000 EBIT 0 0
TEV (in $M): 1,600 TEV/EBIT 0 0

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Noah Holdings is the largest independent wealth management firm in China and was co-founded in 2005 by Jingbo Wang and Zhe Yin, who collectively own ~28% of the company. Noah was seeded in 2007 by Sequoia China, who today owns ~5% of the business. Neil Shen, the founding partner of Sequoia China, is considered to be one of the best investors in China aside from Lei Zhang at Hillhouse and has been on the board since 2016. Neil and the team at Sequoia have been intimately involved in building the culture of the firm alongside CEO Jingbo Wang. Noah Holdings went public in 2010 at a $925 million valuation ($800 million EV). Over the past ten years, Noah has grown the number of registered clients ~58x, has distributed more than $115 billion in financial products, and has grown net income ~14x. Today, the company trades at a $2.6 billion valuation ($1.6 billion EV). 

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China Wealth Management Landscape

Three decades of widespread reform has given rise to the first modern cohort of Chinese high net worth individuals (HNW). And while the last decade has witnessed a tenfold increase in domestic HNW, by almost any metric, the personal wealth accumulation in China is in its infancy. For example, consider that less than 0.5% of Chinese households are HNW, which compares to nearly 6% for the US. With this spectacular growth, China’s capital markets have necessarily evolved to meet the needs of domestic savers. This has taken place as an increase in size (more investable assets), an increase in scope (introduction on new alternative assets classes), and an increase in sophistication (more HNW turning to institutions to manage their wealth). Along these lines, Noah believes the China’s current domestic capital market is very close to that of the United States in the late 1970s when GDP per capita exceed $10,000. At this stage, financial assets account for only 30% of the household investable assets in China, and the value managed by institutional investors is just 18.5%. 

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China Wealth Management – Becoming Something More Familiar

As recent as three years ago, the wealth management offerings in China were something altogether very different than what we are accustomed to in the US. The market was dominated by something known as wealth management products (WMPs). These products offered fixed rates of return well above regulated interest rates for deposits and were used by banks and trust companies to fund investments in sectors where bank credit was restricted. These products generally had a short-term set maturity date and were invested in a range of underlying loans and securities. One critical element to these products, is that they often came with either explicit, or implicit guarantees of principal. In other words, if the bank lost the HNW client’s money, they were expected to pay it back. However, in reality a very small percentage of WMPs actually had contractual guarantees, they were assumed (i.e., implicit), which allowed the banking industry to not report these on balance sheet. This created an increasingly troubling dynamic as non-bank institutions offered WMPs of their own, again with an implicit rather than explicit guarantee. Inevitably, there were some products that failed, and investors never saw a dime of their money back, even while they believed to be investing in a risk-free asset. In the last two years, regulatory authorities in China have come down hard on eliminating the moral hazard associated with WMPs and implicit guarantees. This has meant a transition to what we are accustomed to in the western world, NAV based products. Bond mutual funds replacing WMPs, in addition to an increasing acceptance of equity funds. Noah has been very clear since inception that none of its distributed products come with guarantees. However, they nonetheless have to navigate the mindset of the Chinese HNW at large which has been influenced by these practices. Today, Noah has transitioned entirely to NAV based products, and has eliminated its single counterparty alternative credit products, which were a similar value proposition to WMPs (more on this later). 

Noah Wealth Management

Unlike in the US, Noah distributes financial products to its clients and is paid both an upfront commission (paid by the client), as well as a recurring management fee paid over the fund duration and in some cases a share of carry which are both paid by the GP, not the client. They also provide clients with value added services like insurance, trust services, tax planning, inheritance services, family office formation, etc. (more on this later). Unlike traditional wealth managers, Noah’s brand has largely been synonymous with alternative investments, and private equity in particular. Due to their long standing relationship with Sequoia, Noah was very early to the alternatives space and is able to provide their clients with access to many of the best Private Equity, Hedge Funds, and Real Estate funds in China and abroad. Noah generally will receive 50bps to 1% in an upfront commission, with a slightly lower lever of recurring fee thereafter. 

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Gopher Asset Management

In 2010, Noah started a wholly owned asset management arm called Gopher Asset Management. Gopher largely operates as a fund of funds model, and has products across private equity, hedge funds, credit, public securities, and multi strategy. Today Gopher has $23 billion in AUM which has grown ~5x since 2013 (even after voluntarily redeeming its alt credit products in 2020). Notably, this AUM figure is at historical cost, not market to market. Approximately 70% of the AUM for Gopher is Private Equity, which means Gopher enjoys the same long term locked up capital dynamics as other listed alts (e.g. KKR), albeit with lower fees. Another 8% of AUM is in Real Estate with similar long term locks, while the remainder is invested across Hedge Funds can credit products which can have up to 3 year locks. Gopher receives anywhere from 20-60 basis point management fee, and a 3-5% incentive fee upon the full realization of a fund vehicle. Importantly, all funds are held at cost and Noah does not accrue any of its unearned incentive on the financials. In addition, while Gopher has historically been a FoF, it has been a strategic goal to evolve into more direct and co-investment strategies. Today, almost 40% of the $23 billion AUM is in direct or co-investments which can carry fees as high as 2 & 20. Consider that 65% of Gopher AUM is eligible for performance fees. Doing some quick napkin math… 37.5B RMB of PE FoF that are held at cost and subject to a 4% incentive fee, 37.5B RMB of PE co-investments that are subject at a 10-20% incentive fee, and 10B RMB of Real Estate investments subject to a 10-20% incentive fee. Assuming a 2x gross MOC and a 10% incentive for the direct and co-investments, this current AUM alone would produce $875m of performance fees upon realization. Again, none of this is being accrued for today. Finally, and most importantly, Noah’s fund returns have been exceptional. Many of the public security FoF are beating their benchmarks by 5%+ per annum, the Real Estate investments which are almost entirely direct have returned 16% gross IRR, and the PE funds have been mid-teens IRR. I would expect these solid returns to continue to attract inflows. 


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