Sino-foreign asset management joint ventures pose big challenges, particularly for the minority - , foreign partner. But at least the deal announced yesterday by Hong Kong’s Value Partners will unite two fund houses with closer ties than in many other mainland fund JVs.
Value Partners agreed in November to acquire Belgian firm KBC Asset Management’s 49% equity interest (the maximum possible for a foreign firm) in Shanghai-based KBC Goldstate for an estimated Rmb40.5 million (HK$49.8 million).
The JV between KBC AM (49%) and Goldstate Securities (51%) manages seven funds with Rmb970 million of assets under management as of December 31.
The 49% acquisition will, subject to certain conditions and approvals, create Value Partners Goldstate Fund Management.
Jimmy Chan, chief executive of Value Partners, outlines to AsianInvestor the opportunities he sees for the merged entity. But he also acknowledges the challenges, initially with gaining required approvals and later in terms of making a success of the business.
Value Partners has been looking for a financial firm in China for the past two years; it could have acquired one or done a greenfield project, he says. One motivation behind buying the Goldstate stake was partly that it's a small firm. “We could have invested in a bigger firm that is already profitable, but we’d have paid a higher price and may not have got a 49% stake,” he adds.
Chan says the risk of doing that would have been higher, given that they’d be paying a high price for a substantial AUM without necessarily knowing how “solid” it is.
It’s challenging and expensive enough starting a JV without having laid out huge costs for the business, given that there are major expenses to follow, says Chan. “Starting a JV takes a very onerous approval process that may take three years and millions of dollars.”
The acquiring firm must set up operations, systems and infrastructure before it will get approval. Hence Value Partners preferred to start with a relatively low outlay of Rmb40 million, notes Chan.
Moreover, since foreign firms can only hold up to a 49% stake in a Chinese fund manager, he says, “it’s important to find the right partner and right management team.”
Chan says Value Partners feels very comfortable with the experienced pairing of chief executive Zhang Jiabin and chief investment officer Pan Jiang, among others. Zhang was previously general manager at Minsheng Royal FMC from November 2008 to January 2011, while Pan’s previous role was as CIO at another JV, Franklin Templeton Sealand.
Yet despite an operational life of over five years, KBC Goldstate manages only seven mutual funds – one bond, three balanced and three equity products. It has no presence in the space of qualified domestic institutional investor (QDII), exchange-traded fund or index products.
It suffered a 60% drop in assets under management last year to $197 million, and it had been reported previously that KBC was set to become the first foreign firm to exit China's fund management industry by selling its 49% stake in the JV.
“They’re looking to us to help them turn the business around and enhance their performance, as we have 19 years’ experience investing in China and started as a very small firm,” says Chan. “We’ve been through the same experiences, so we’re a very good fit.”
The firm therefore has no plans to change the KBC Goldstate management team, he adds, “but of course we will watch them closely. We may send in consultants but we are not going to participate in the management.”
Moreover, Value Partners has no plans to increase headcount in view of the market environment being “very tough”, says Chan. But the Hong Kong firm will provide support in the form of sharing its views, providing technology investment, research, training and help with product development.
Value Partners also plans to apply for both a QDII and QFII licence, with the latter likely to come first, given the relatively strict requirements for QDII approval, says Chan. But the firm hopes to secure QFII approval by the end of the year.
In terms of product offering, one issue the JV has had is that it has not specialised enough, says consultancy Z-Ben Advisors. This is something Value Partners can potentially help with, given its strength as a hedge fund and ETF manager.
However, Chan notes it’s still early days given that the JV is not yet complete. “We’ve shared ideas but haven’t really devised a plan as such,” he says. “But we definitely have products they don’t have, such as ETFs and hedge fund products.”
That said, he adds that regulatory obstacles in China mean the market may not yet be ready for some of these offerings. “So it will take time, but we think there are synergies.”
The Goldstate acquisition is part of Value Partners’ wider strategy to continue to expand its presence in Greater China. Chan points to two other agreements the firm made last year: its JV with Yunnan Industrial Investment Holding Group to set up a private equity firm in China; and its purchase of a KBC AM’s 55.46% stake in KBC Concord Asset Management in Taiwan.
Goldstate Securities is a licensed securities firm with 27 branch offices in China offering services including investment banking, brokerage and securities trading, asset management and financial advisory.
The board of directors of KBC Goldstate will consist of eight directors; two will be nominated by Value Partners and two by Goldstate Securities, one will be the general manager nominated by the shareholders and three will be independent directors.
Of the independent directors, one will be nominated by Value Partners and two by Goldstate Securities. The chairman will be selected from the directors nominated by Goldstate Securities and the vice-chairman from the directors nominated by Value Partners.