China to let foreigners own plurality of fund JVs

In the queue for Sino-foreign joint ventures for fund management, two small deals stand out: in both cases the foreign party is expected to attain a plurality of shares. Although foreign partners can own up to 49% and many structures involve three or more parties, so far all these deals involve one local player holding more shares than the others.

In one case, Invesco and its main partner, Great Wall Securities, both own 49% with the other 2% held by two other passive members.

But two new tie-ups reportedly will see the foreign party with an outright plurality. Banca Lombarda, a mid-sized bank from Italy's Lombard and Piedmont provinces, is taking 49% of a Shanghai-based JV company with Guodu Securities, a Beijing-headquartered company that is taking only 47%, with Ting Ding Mountain Coal holding the other 2%.

Separately, Lord Abbett, a $100 billion independent fund management company in New York with a pedigree dating back to 1929, is taking 49% of a JV with Yangtze Securities and Qinghua University sharing the rest.

Under Chinese law, a securities company may take stakes in two mutual fund companies but a majority in only one. However neither Guodu nor Yangtze already own stakes, majority of otherwise, in a fund company. One reason they may be willing to cede the plurality is that they recognize they have no experience in fund management.

Another reason is that the Chinese Securities Regulatory Commission, which must approve these JVs, is growing more comfortable with these Sino-foreign JVs.

Banca Lombarda has hired Ian Midgley from HSBC Asset Management as its lead portfolio manager, while the JV's CEO is a Lombarda secondment, Luca Frontini. For both Lombarda and Lord Abbett, these deals represent their first forays into Asia.

Both JVs are said to expect approval from the CSRC to set up in the coming weeks, with first product launches slated for the second quarter of 2006.

These developments may have significance for larger, more established players. For example, now that commercial banks are allowed to own pieces of a fund management company, those with securities arms already involved in JVs are looking to get involved. China Merchants Bank and Everbright Bank are two institutions reportedly negotiating with their securities arms to take stakes in existing JVs with ING Investment Management and US-based Prudential Asset Management, respectively. It is possible that these will see the foreign party able to gain a plurality; for example, ING is said to be negotiating for a 40% stake with China Merchants Bank taking a large share of China Merchants Securities' holdings, diluting it down below ING's level.

Peter Alexander, an industry consultant at Z-Ben Advisors in Shanghai, says the two new JVs signal a widening of options for foreign fund houses in these JVs, although he notes there is no sign yet that this will translate into a 50.1% stake anytime soon. But all of this could prove to be storms in teacups.

"What does control mean?" he wonders. "Will the foreign partner really have more say in the JV's strategic planning and operations?" He believes successful JVs in China depend on smooth relations among the parties, regardless of who owns the bigger slice.