Z-Ben Advisors is a Shanghai-based consulting firm whose core analytical interest is in exploring all opportunities open and available to the foreign asset management and servicing community within the Chinese investment management market.
Jonathan opened his presentation by forecasting that the size of the PRC investment management market will increase by 93% from RMB92tr in 2010 to RMB178.6tr in 2015. Having grabbed everyone's attention with these staggering numbers, he then predicted that with further maturing of the financial services market, bank deposits share of total asset allocation will decline from 85% in 2010 to 80% in 2015. Mutual funds AUM is expected to show a Compound Annual Growth Rate (CAGR) of 22%, and while Trust products targeting high net worth individuals anticipate an even more robust CAGR of 25%. This means there continues to be a massive opportunity for asset managers to target Chinese investors, as increasing demand for professionally managed financial products and services continue to drive disintermediation out of basic bank deposits. The fund management company continues to be the primary platform serving the mass retail segment. As this segment is projected to grow significantly, there still remains significant upside in developing and further expanding this platform.
So what are the platform options for foreign asset managers to get in on the action? The current major investment platforms require a JV structure (FMC JV maximum 49% foreign participation, Securities firm JV max. 49%, Trust JV max. 20%) limiting the investment, business development and growth opportunities for foreign firms. Unlike these JV platforms, the Wholly Foreign Owned Enterprise (WFOE) may be an efficient route to 100% ownership of a Chinese investment management platform, provided that the foreign applicant is able to secure 'investment advisory' within its scope of business. Doing so will allow the WFOE to operate in the same manner as local “private fund managers”. While current regulations prevent private fund managers from issuing products themselves, they are allowed to 'advise' trust-sponsored products. Of the currently~1000 domestic private fund managers in China, only 30 or so are considered significant players, providing a unique market entry opportunity for foreign firms. Precedent has already been set by a few mid-tier foreign firms employing this WFOE-private fund manager concept, with several major firms currently in exploration mode.
Cross-border program developments have also gained momentum, with the QDII, QFII and RQFII programs benefitting from quota and scope expansion. The relatively new QFLP program, allowing foreign firms to convert offshore-raised assets into RMB for direct investments onshore, is likely to become the vehicle of choice for foreign PE/VC firms seeking onshore exposure for foreign-sourced capital. Most recently, the prospective QDLP program will finally allow foreign PE (and likely hedge fund) managers to raise assets from Chinese LPs onshore, and make direct investments offshore. Doing so will first require the establishment of again, a WFOE platform.
Jonathan concluded his presentation by summarizing the continued growth opportunities through the traditional JV platforms (fund management, securities, and trusts) yet their limited nature due to foreign shareholding restrictions. The WFOE represents an alternative solution for foreign firms, allowing 100% ownership and control over a platform from which to launch myriad functions and businesses (e.g. research, marketing, distribution, and perhaps even discretionary investment advisory) in the Mainland today.