Invesco changes horses in China stream

The China Securities Regulatory Commission in Beijing has authorized Invesco to establish an asset management joint venture company. Invesco, a unit of Anglo-American investment manager Amvescap, had been engaged in an informal partnership with Shenzhen-based Penghua Fund Management.

But the JV is not with Penghua, but with Great Wall Securities, and it will be called Invesco Great Wall.

Invesco's Asia Pacific CEO Andrew Lo explains the firm has been in talks with Great Wall, also based in Shenzhen, since the second quarter of this year, and once those began, had terminated its cooperation agreements with Penghua.

Invesco had been the second foreign fund manager to sign a technical advisory agreement with a domestic money manager (after JF Asset Management, now a unit of JPMorgan Chase, partnered with Shanghai's Huaan Fund Management). In that capacity, it assisted Penghua in launching one of China's first open-ended mutual funds.

Since that time the CSRC has issued its guidelines for Sino-foreign fund management JVs, which barred domestic fund management companies from setting up a new fund management JV; only securities companies could do that. Meanwhile, while the management of domestic money managers were often eager to deepen relationships, many foreigners have found signing a deal difficult because these partners have multiple owners who may be reluctant to dilute their stake in a successful business. In some cases there are also political issues.

The result is that so far, several JVs have been announced (by Allianz Dresdner and SG as well as Invesco) but all of them are with securities companies to set up greenfield asset management companies.

When presented with the suggestion that Invesco left Penghua because of these CSRC rules - a suggestion implying that JVs with existing fund management companies are hopeless - Lo demurred. He says such JV talks are not "China-specific." Instead, he highlights that any JV requires the right partner and agreement on key terms, roles and responsibilities.

"It's harder on existing companies," he says. "They have their ways of doing things. New ones have no legacy, they start with a clean sheet of paper." He adds that the split with Penghua was amicable, for while their cooperation made Penghua the preferred JV choice, both sides were able to seek alternatives.

Says Lo: "Our idea has always been to play an active role in China. The CSRC rules stipulated that we had to form a joint venture in order to play. We would like to be an active participant, with equal status, equal partnership and an equal management role. We discussed this with Penghua and in the end we could not agree. They are an established and successful company."

Negotiating with Great Wall Securities proved easier. Penghua has several owners, including securities and investment trust companies, but its most important one is the Shenzhen municipal government. Great Wall Securities is 51% owned by Huaneng Power, a private company (and 25% owned by China Merchants Bank).

And Invesco was able to maintain parity with Great Wall in the JV despite being limited to 33%. It and Great Wall have agreed to each own 33%, with two other companies splitting the remaining third equally. When foreigners are allowed to own up to 49% in three years, then both Invesco and Great Wall will raise their stakes to 49%, buying out all but 2% of the remainder. (Lo declined to name the other two investors; one is a state-owned enterprise and one is a private company.) "We have an investment philosophy of parity to reflect that this is a true joint venture and that we are both equal partners."

Now the JV is grappling with recruitment issues, as well as setting up operating systems and IT, and negotiating distribution arrangements with banks and brokers, in preparation to move from the preparatory license to an operating license. The chairman will be selected by Great Wall and the CEO will come from Invesco, but at this point those names are not being announced.