UBS Asset Management yesterday became the second foreign fund house to obtain a private fund management (PFM) licence in China – but it has taken a different route to do so than Fidelity, the first to win approval.
At least two other asset managers are close to obtaining a PFM licence, said a Shanghai-based source familiar with the process. Meanwhile, some applications have outstanding issues that the fund houses need to iron out with the regulator, added the unnamed individual, and more applications are expected towards the end of the year.
For instance, Andrew Lo, head of Asia Pacific at Invesco, said on June 19 that his firm would apply for a PFM licence “very soon”, with its initial focus to be on building A-share capability. And BNY Mellon said last week it had set up an IM-WFOE but had not yet sought a PFM licence, implying it would do so. There are at least 14 foreign firms with IM-WFOEs that could now apply.
New route to a PFM licence
UBS AM converted its qualified domestic limited partnership wholly foreign-owned enterprise (QDLP WFOE) in Shanghai into an investment management WFOE in April. It is the latter entity that has been granted the PFM licence.
This means the Swiss firm will need to set up another QDLP WFOE if it is to use that cross-border scheme for raising capital from mainland investors, said the anonymous source. The QDLP scheme allows the set-up of feeder funds to raise renminbi to invest into overseas products.
Asked about the staff headcount at the UBS AM's IM-WFOE, Aries Tung, China head of strategy and business development, was non-committal. He said the firm would gradually put in place a team of portfolio managers, legal and compliance executives and operations, sales and marketing and risk management personnel.
The IM WFOE has products in the pipeline covering China onshore equities, fixed income and multi-asset, added Tung. “We have prepared an equities product and a fixed income product, and aim to launch the first product in due course.”
Fidelity, meanwhile, had already raised its first private fund in May – a bond product – having obtained PFM approval in January.
Challenges for foreign players
The anonymous individual said: “The Chinese regulator is encouraging applications for PFM licences, as it is an important part of the opening-up policy. But the most important issue now is whether foreign asset managers are willing to do business in China, and how to make the business profitable.
“On the one hand, foreign managers need to get internal approval to allow them to do business in China; they will need to comply with local regulations and devote time and resources to hiring, setting up an office and capital injection."
And once they are established, added the source, they will face competition from domestic fund managers. “How to survive and be successful in China is a key issue for foreign asset managers to overcome.”
Industry observers have also pointed out other challenges faced by foreign fund houses, namely: the need to cater to Chinese investors’ demand for constant high returns; the extent to which they can apply technical investment advantages they have deployed in overseas markets; and how deeply they can cultivate client bases if they don't have a local shareholder.
That said, big western brand names such as Fidelity and UBS are well known among mainland investors, and domestic Chinese fund houses have already voiced concerns about competition from foreign players.