WFOEs trump JVs for China entry, but hard road awaits
International asset managers are busy building teams at—or queuing to set up—wholly foreign-owned entities in China. But they are less keen on taking the joint venture route into the mainland funds industry, even though they can now hold controlling stakes in onshore JVs.
Why? The Chinese firm is always the dominant partner in any such tie-up, and is very unlikely to relinquish control of a successful business—except perhaps for an eye-watering price.
Hardly surprising, then, that it looks a more attractive proposition to have full control from the start in the form of an investment management WFOE, especially as 100% ownership would not be possible until 2020.
(In November Beijing announced the planned raising of the cap on foreign ownership of domestic fund firms to 51% from 49%, and its removal after three years. This accompanied similar moves in respect of local brokerages and insurers.)
Tough road
Global asset managers AsianInvestor spoke to are well aware how tough it will be to make a success of an IM WFOE with a private fund management (PFM) licence. And so they should be. The reality is that many of them will struggle to make money, despite the huge potential market.
They can offer international expertise and a potentially wider range of products and underlyings to clients, but can they match the performance of local players?
And foreign fund houses face several big challenges: from sourcing and retaining talent to to making their investment strategy work in China to building a distribution network.
Perhaps the biggest issue right now is the rush for personnel, as AsianInvestor reported earlier this month. Every firm needs the same thing: a general manager, a chief investment officer, equity and bond heads, perhaps a multi-asset specialist, a compliance head, a chief financial officer, sales and operations staff. Running a mainland unit with three or four staff is no longer sufficient.
Finding individuals with suitable technical expertise and contacts is difficult—finding ones with the right language skills is even harder. One Asia head at an international fund house told AsianInvestor that many foreign players he knew had given up trying local Chinese investment professionals with decent English and were having to compromise.
Meanwhile, some foreign institutional investors—such as pension plans, insurers and sovereign wealth funds—are also increasing their China exposure and looking to expand their internal expertise to that end. A case in point: Canada Pension Plan Investment Board late last year hired Alina Chiew from Goldman Sachs Asset Management, where she was head of China equities.
A question of commitment
Then there is challenge of convincing potential employees that your fund house has strong commitment to and understanding of China. Are you just another foreign manager following the herd or are you going to stick it out and stomach some losses for several years? Will you adapt to how things operate in Shanghai rather than trying to impose the London or New York way of working?
And even if an individual is interested in a proposed vacancy, they won't come cheap. One Hong Kong-based recruiter told AsianInvestor: “There’s an illusion that people in Chinese domestic firms don’t get paid well, but they do. They get paid very well. For instance, many CIOs at privately held Chinese funds are on a straight percentage of returns.”
Indeed, that raises another hurdle for foreign players: adapting to the mainland approach to investment. Because Chinese portfolio managers with stellar track records often speak little or no English, the unnamed recruiter said, the big global fund houses will frequently question such individuals’ investing methodology and avoid hiring them.
But Chinese retail investors—the holy grail for foreign asset managers—are simply seeking returns, he noted. “Why would they want a second-quartile fund from foreign house when they’ve been buying first-quartile product from a local firm for years?”
Distribution difficulties
Of course, to have gotten this far in the first place and sustain its business, an asset manager must have established decent distribution. Local partnerships are key. That often comes built into a joint venture.
However, a newly established IM WFOE will have to compete for banks’ shelf space not only against its foreign peers but also against other domestic players with long-standing tie-ups. The fundraising success of ICBC Credit Suisse Asset Management, for instance, is above all down to Beijing-based ICBC’s huge branch network across the country.
Needless to say, it is also an crucial for fund businesses to have an in-depth understanding of how Chinese policy and regulations operate—and be flexible enough to deal with them when they change at short notice. The goalposts will inevitably shift, and there is little point in blaming the powers that be in Beijing when they do.
As the anonymous recruiter put it: “China is littered with the burnt-out cars of international companies that have gone in, assumed a lot and not gotten it right.”