Fund JVs could follow SocGen’s mooted China exit
Societe Generale’s reported departure from its mainland fund joint venture appears to be down to a strategic shift by the French financial group. But it could be followed by other foreign firms exiting their JVs too, as China’s economy slows and its fund industry opens.
The French group is reportedly seeking to offload its 49% stake in Shanghai fund joint venture Fortune SG Fund Management to US-based private equity firm Warburg Pincus. It is holding the JV via its subsidiary Lyxor Asset Management, which manages a total of €115.9 billion ($130 billion) as of May.
If the deal completes, SocGen will be the latest in a growing set of foreign fund shareholders to exit a mainland JV. BNY Mellon, State Street Global Advisors (SSgA), Value Partners, Lord Abbett and Ashmore have all ditched their JV stakes over the past two years.
Shanghai-based Fortune SG appears to be something of an exception to these other JV exits, however. Most of the former divorces were caused by culture differences, business strategy disagreement or unprofitable businesses. In contrast, Fortune SG is the 16th-largest mainland fund house, boasting Rmb157 billion ($24 billion) in AUM. It topped Asia's fastest growing fund companies and ranked as one of the top 20 most profitable managers in China last year.
So did SocGen exit a fast-growing and seemingly successful business in China?
“SocGen has been gradually reducing its asset management business over the last number of years,” noted by Piers Brown, a London-based securities analyst at Macquarie, in an email to AsianInvestor. “I have not heard about the China sale but it would be consistent with what we have seen.”
“What we hear is the group had planned to exit some of its asset management business,” added a Shanghai-based consultant who preferred to remain anonymous. “It does not seem that an issue emerged between mainland and foreign shareholders, as the reported buyer Warburg Pincus is also a foreigner.”
SocGen has shown its willingness to reduce its asset management exposure, disposing of its 20% holdings in French fund manager Amundi last November when the latter listed in Paris.
The French financial group said at the time it did so in order to optimise its portfolio of activities and capital allocation, to better focus on its core businesses. That would suggest it doesn't consider asset management to be part of this core.
SocGen’s Asia-Pacific declined to comment. Warburg Pincus did not respond AsianInvestor’s enquiry before press time.
The French group may also have decided it was better to sell out of a business that is exposed to a market facing an increasingly uncertain financial future.
“Different foreign asset managers are viewing China differently; some of them hold an either uncertain or negative view despite mainland fund industry growth,” said a Shanghai-based lawyer who asked to remain anonymous. “The reason is not merely because of their limitation in [terms of their ownership in] minority holdings, but also due to macro market risks including shadow banking business and risk controls over credit defaults.”
Foreign managers are increasingly reviewing their exposures in China. Some of their mainland fund JVs have entered the risky shadow banking business via segregated account (SA) subsidiaries, which could leave them subject to capital requirements, as reported. However, Fortune SG had not established an SA subsidiary.
Companies that have mainland fund JVs are studying their risks and potential on a case by case basis, noted Ivan Shi, Shanghai-based research director at Z-Ben Advisors. In addition to concerns over fund SA subsidiaries, he added foreign managers will review their JV if the units are newly-formed and proving difficult to grow. Some foreign companies are considering the merits of opening wholly foreign-owned enterprises instead, in order to enter the private fund business.
Another point of contention between foreign fund managers and their mainland partners has been how to handle investment losses. Many mainland fund managers’ bond funds or money market funds have been embroiled in credit default events, but foreign managers disagreed with their Chinese shareholders over the latter using internal capital to cover investors’ losses.
“Foreign shareholders hold a different concept of risk controls, and they foresee such default cases will continue,” the anonymous lawyer added. “In the long term, most of them keen of have 100%-owned enterprises.”