KBC could be first foreign firm to exit China's FM industry

The Belgian firm is looking to offload its 49% stake in a joint venture with Goldstate, potentially setting a floor price for the sale of Chinese FMC stakes, notes Z-Ben Advisors.

Belgian bancassurance group KBC could become the first foreign firm to exit China’s fund management industry amid reports it is seeking to offload its 49% stake in KBC Goldstate.

Consultancy Z-Ben Advisors says it’s no surprise that KBC has put its stake in the joint-venture on the block. Not only did the tie-up witness a 60% drop in estimated assets under management last year to $197 million, but KBC itself has received at least three rounds of bailout capital from the Belgian government over the past two-and-a-half years, with its chief executive Jan Vanhevel consistently advocating a retrenchment to core operations.

KBC closed its Shanghai representative office in 2009 and is selling off its global project finance business, although KBC Consultancy Services (Shenzhen) – which scouts investment opportunities for the Hong Kong branch of KBC’s asset management unit – is not part of any intended sale, Z-Ben states.

Francois Guilloux, director of regional sales for Z-Ben, believes that finding a buyer for KBC’s stake might be one of the more difficult feats of corporate marketing in China this year.

Despite an operational life of over four years, KBC Goldstate only boasts six funds – one bond, two balanced and three very small equity products – just one of which remains large enough to be consistently profitable, he points out.

“The firm has no presence in any of the faster-growing fund sectors – QDII, ETF or Index – and is one of the oldest FMCs in China not to offer a money-market fund,” writes Guilloux.

“Knock three years off its operational history and we might consider KBC Goldstate to be a greenfield that has yet to enjoy any good luck. Add them back on and what remains is the stuff of cautionary tales: fail to take risks and this is how far you’ll be left behind.”

He argues it will be difficult to persuade potential buyers that a significant premium to greenfield expenses should be paid to secure a partnership. The China Securities Regulatory Commission (CSRC) awarded Goldstate the second lowest rating of any brokerage in China in 2010.

Although fees from asset management make up a high percentage of Goldstate’s annual income, the firm appears to have given little direction to its FMC subsidiary, says Guilloux. In the sale, therefore, he says it will probably need to focus on the fact that 49% stakes are becoming more difficult to acquire in China.

“Our advice to potential buyers of KBC’s stake: think hard before pulling the trigger,” he says. “In this instance we expect a floor price for Chinese FMC stakes to be established, although estimates of value are difficult to construct.”

He expects a sale price of 4-5% of AUM, but acknowledges the possibility of Chinese counterparties pushing for a sale to domestic institutions, potentially pushing valuation to around 1-2%, or an estimated $2 million.

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