In a first for the Chinese fund industry, ING Group announced it had agreed to sell its entire 33.3% stake in a local joint venture to its two domestic partners.

The Dutch financial services firm offloaded its interest in China Merchants Fund Management for €98 million ($127 million) to China Merchants Bank and China Merchants Securities.

The fact the manager’s local shareholders acquired the stake should come as no surprise, notes Shanghai-based consultancy Z-Ben Advisors, as they would have wanted to exercise their right of first refusal (now possible thanks to a revision in rules governing maximum ownership limits).

The consultancy suggests the price does not represent value for ING, which is in the process of selling assets on the back of a €10 billion government bailout in 2008.

The sale indicates an enterprise value for China Merchants Fund Management of €295 million. “There is no question that ING profited handsomely from its decade-long ownership of CMF,” Z-Ben says, but argues that based on comparable transactions, it does not represent full value.

It says common valuations range between 7-8% of AUM and 17-19x trailing earnings, compared with 4% and 14x for ING’s deal. “We can conclude that the take in CMF should have fetched a higher price, but that would only have been possible if ING were not working with counterparties holding a right of first refusal while at the same time being under pressure to close a deal,” says Francois Guilloux, Z-Ben sales director.

Taking those variables into account, it says the deal should probably be viewed as a win for ING.

On the future of the fund firm, Z-Ben notes it expects CMF ultimately to have two shareholders, with China Merchants Bank owning 80% and the remaining 20% to be bought by a new foreign firm.

It argues that China Merchants Securities will likely look to sell its stake in the JV as it has an incentive to use the proceeds to increase its stake in Bosera Fund Management (48%) now that shareholders can own in excess of 49% of a local manager.

With common valuations of 7-8% of AUM, CMF’s future enterprise value could rise as high as Rmb4.5 billion, compared with Rmb2.5 billion for the ING transaction, notes Z-Ben.

It suggests this could be viewed as excessive given industry dynamics, such as flat AUM over the past three years and rising competition, making it difficult to raise and retain assets. There is also margin squeeze as distributors push for additional fee sharing.

However, Z-Ben notes it is this last point that might make an investment in CMF worthwhile. It states that CMB has not been overly supportive of CMF in the past when it comes to distribution, since its 33% stake made little economic sense for it to do so.

But under expectation that CMB could end up owning 80% of the manager, Z-Ben suspects CMF will likely see a significant rise in distribution support from the parent.

“This, along with other possible benefits in tying up with CMB, would make an investment even totalling $145 million, extremely appealing,” says Guilloux. “For those foreign firms looking at entering the Chinese fund management marketplace, it may be an error to dismiss the opportunity simply based on price.”