Breakeven fears for China FMCs as Fuanda joins the fray

Apr 20, 2011

Fuanda FMC gains approval to set up in an increasingly crowded market, but it will have its work cut out with operating costs for China's fund managers having doubled over the past five years, says Z-Ben Advisors.

Consultancy Z-Ben Advisors says reaching breakeven is becoming problematic for Chinese fund management firms, even as Fuanda became the latest to enter this increasingly crowded field.

Fuanda FMC secured regulatory approval to begin operations, likely this year. It’s the fourth FMC to be approved in the past year after BNY Mellon Western, Zheshang FMC and Ping An UOB, and China’s 64th overall.

But Francois Guilloux, Shanghai-based regional sales director for consultancy Z-Ben Advisors, stresses that they are all coming into an increasingly crowded bottom-tier, “one in which growing market share has become much more difficult than it was several years ago”.

He says reaching breakeven is becoming increasingly hard for small firms as operating costs are rising quickly. Z-Ben research finds that in 2005 a small firm needed Rmb5 billion in AUM to break even, but that number has since doubled.

A number of FMCs have experienced difficulty in generating cashflows including New China, which as little as two years ago was seen as a strong contender. But departures and declines in performance have seen its gains eroded and it is now allegedly seeking a cash injection, says Guilloux.

“With only Rmb160 million ($24.5 million) in registered capital and challenging fundraising prospects, Fuanda FMC has its work cut out,” he adds. “In fact, almost every firm founded after 2008 is now having to raise its registered capital to cope with higher operating costs.”

Guilloux argues that Fuanda will need to generate performance and forge strong links with distributors to distinguish itself, which won’t be easy given rising costs at major bank channels.

However, he notes that its largest shareholder, Nanjing Securities (49%), has a strong track record and that its new general manager, Li Jianfeng, is also vice-president of Nanjing Securities.

“If the FMC is able to replicate performance stability at Nanjing Securities, there is a chance they will be a strong contender among small-tier firms,” he says. “Nanjing Securities is primarily a regional player, meaning that Fuanda will need to look beyond its majority shareholder’s network if it is to realise strong fundraising for its new products.”

BNY Mellon Western reportedly struggled to raise money for its debut equity fund, eventually breaking the Rmb1 billion mark by launch, the firm points out.

Nevertheless, interest in entering the industry remains strong, with firms such as Essence Securities, Caitong Securities, Golden Sun Securities and Tebon Securities all reportedly pursuing their own FMCs. And that’s to say nothing of the host of foreign firms still seeking to gain a foothold.

Z-Ben expects the China Securities Regulatory Commission to permit two or three FMCs to set up each year, even as industry AUM as a whole becomes more concentrated among top-tier firms.