State Street Bank may invest up to W2.5 billion ($2.2 million) in paid up capital to gain half ownership of the fund administration arm of Korea Exchange Bank (KEB), Korea's largest fund administrator, as early as the end of this year to position for the country's deregulating mutual fund industry.
According to sources close to the talks, State Street's lawyers in Boston are currently going over the fine print of the 50:50 joint venture proposal. It is understood, however, KEB management is keen to retain majority control of the company, offering a 51:49 deal.
KK Tse, State Street's managing director in Asia, confirms the bank is in the process of selecting a local partner to expand its fund administration business, but stops short of naming KEB as its current joint venture target.
"By the end of this year we will have the capacity to service the upcoming open-ended mutual funds market in Korea, providing them with investment administration services," Tse says. "The market has rumored that KEB and State Street are forming a joint venture. But until the joint venture is formed it's inappropriate to make known the name. All I can say is we're teaming up with the best player in the market and it will take a few months to go through the due diligence."
Korea's domestic funds market is estimated to be around W200 trillion ($175.9 billion) in monetary terms. KEB currently has around W2 trillion won under administration while rival A Brain, a fund administration company set up just over a year ago, has W2.95 trillion. A Brain formed a partnership with Deutsche Bank in August, providing back office support to local fund managers.
If KEB is to form a joint venture in the coming months, there will be glitches for the foreign partner to iron out.
First, KEB is seen to be a likely takeover target by stronger domestic banks in Korea's second round of financial restructuring. If a takeover is to occur before the joint venture deal is sealed, then the foreign partner may have to renegotiate with a merged bank, not KEB.
Furthermore, if the joint venture is to take place before the buyout, it could prove messy if the future owner does not view favorably the partnership between KEB and its foreign partner. The worry is that the new owner may want to run the potentially lucrative business itself given the fund administration market is set to experience exponential growth because mutual funds and investment trust companies will be forced to outsource their fund administration work to independent third parties.
But MY Ban, State Street's vice president in Korea, dismisses the concern, saying that the two banks - Housing & Commercial Bank and Kookmin Bank - who are likely to vie for the ownership of KEB currently do not have their own fund administration services. On technology, KEB's administration system is constantly criticized by newer administrators as outdated and inefficient. They say the company is still reliant on manual processing of trades, where efficiency and accuracy can become a problem as fund administrators' workload is set to increase in the near future.
But Ban counters that KEB already has invested more than $1 million on system upgrades and part of KEB's work is now outsourced to PricewaterhouseCoopers.