The latest financial technology player to move into China’s funds industry has highlighted growing demand for distribution partnerships with mutual fund houses.
After the storming success of e-commerce giant Alibaba’s money market fund (MMF), the second tech company to enter the funds industry is looking to replicate its returns.
Relaxed rules have made fund-tech marriages easier, with analysts pointing out that the two industries share common targets over mass-retail investors and internet financing products.
But tech firms have been warned of the need to invest a significant amount of resources in such partnerships, with easy profits in the early days likely to be hard to come by.
CreditEase, China’s peer-to-peer (P2P) microcredit loan and internet finance platform, acquired a 49% stake in Shanghai-based Nuode Asset Management earlier this month from former shareholder Lord Abbett, a US-based investment management firm.
Asked if the firms will collaborate over products, a Nuode spokesperson said executives from both parties were discussing future business plans. The spokesperson said Nuode would launch a new fund in the second half, but she declined to comment on whether its funds would team up with CreditEase.
Followed the successful partnership between Alibaba and Tianhong Asset Management, CreditEase has become the second tech company to enter China’s mutual fund industry.
Alibaba initially planned to acquire Tianhong shares in October 2013, after the successful launch of Yu’EBao. The acquisition was finally completed in February this year, and Alibaba has become the majority Tianhong shareholder with a 51% stake through its affiliated subsidiary Ant Financial Services Group. Alibaba also acquired a 49% stake in Shanghai-based Tebon Fund Management in February this year.
Tencent is taking an alternative approach to fintech. The Chinese internet giant is setting up a mutual fund company - Gauteng Fund Management - with Hillhouse Capital. Tencent will have a 49% stake while Hillhouse holds 51% of the shares, according to an application made to the China Securities Regulatory Commission (CSRC) earlier this month.
Founded by Zhang Lei, Hillhouse Capital is well-known for its investments in internet and consumer companies and its relationship with Yale University’s endowment fund.
Technology firms’ interest in the funds business has been ignited by a relaxation of the rules over the acquisition of stakes in mutual fund companies. In fund laws implemented in June 2013, the CSRC liberalised regulations to let more entities enter the funds business and loosened rules over fund houses’ major shareholders (those holding more than 25% of the shares). For example, a major shareholder no longer has to be a financial institution.
January Sun, associate at Shanghai-based consultancy Z-Ben Advisors, said that Alibaba’s controlling stake in Tianhong was an important signal to the market. “Other technology companies have seen lower hurdles in shareholder requirements, and they want to enter the fund industry,” she said.
“Both tech and fund companies are targeting the same group of investors in the mass retail segment,” Sun noted. Yu’EBao has demonstrated the potential success of such partnerships, while Chinese tech firms would like to explore possible collaborations since they are more willing than most to enter new industries, she added.
Yu’EBao, China’s largest MMF, has enjoyed huge success by wedding the tech and fund industries. It channels consumers’ idle money in Alipay, Alibaba’s online and mobile payment system, into an MMF managed by Tianhong.
However, Sun said tech firms would need to invest a large amount of resources in the initial stages, and it would not be easy to generate profits early on.
Sun said she expected that most tech firms wanting to control a fund firm and develop products in the future will tend to acquire shares in small-sized companies.
Tianhong was ranked the 50th largest fund firm by AUM before it teamed up with Alibaba in mid-2013, but it rocketed to the No 1 spot in nine months after the launch of Yu’EBao. Nuode was ranked 85th with a total of Rmb2.2 billion ($354.2 million) in mutual fund AUM as of the end of June this year.
Presently, mainland Chinese institutions are only allowed to have one controlling stake and one minority stake in two fund companies.