While Invesco believes that it will have a majority stake in its fund management joint venture firm in China, the deal with its domestic partners has not yet been finalised.
“There’s a meeting of the minds that [Invesco] will increase the shareholding,” Martin Flanagan, Invesco’s US-based president and CEO, said during its fourth quarter earnings call in late-January.
“[But] we’ve not come to final terms,” he said.
In 2018, Invesco already reached an “agreement in principle” with its domestic partners to obtain a majority stake of the joint venture.
Invesco and China-based Great Wall Securities each own 49% of the Shenzhen-based joint venture, Invesco Great Wall, while Kailuan Group and Dalian Shide Group each have 1% each. Invesco Great Wall was established in 2004 and now has assets of $34bn.
The plan comes after China’s securities regulator relaxed joint venture ownership limits for foreign asset managers in April 2018, in which foreign players can now apply for up to 51% ownership in a Chinese fund management firm. In addition, the regulator also plans to remove the 51% cap by 2021, allowing foreign firms 100% ownership of domestic asset managers.
Management control
Although Invesco’s plan of having a majority stake has not yet been finalised, Flanagan noted that Invesco has management control of the joint venture.
“I think a very important point is [having a major shareholding] is less relevant for us than others because the point is we have management control and we have had management control of the joint venture,” he said during the earnings call.
So far, JP Morgan Asset Management is the only foreign company to hold a majority stake in a Chinese mutual fund business. In August, the firm paid $35m for an additional 2% stake in its onshore joint venture, China International Fund Management (CIFM), which it had originally set-up with Shanghai International Trust in 2004. Morgan Stanley and HSBC are also rumoured to be preparing to assume control over their joint ventures.
Not all joint venture fund management firms have been successful in China.
For example, Russell Investments had a joint venture established in 2011 with Ping An, but ended in 2015. The joint venture ended “in failure with the JV dissolved after just four years due to intense strife between the shareholders” of both firms, Peter Alexander, managing director at Z-Ben Advisors, said previously. A Reuters report also said that the US firm “quietly withdrew” from the joint venture because it believed that Ping An would benefit more than Russell.
“Reassessing the valuation”
Shanghai-based consultancy firm Z-Ben Advisors speculates that the JV deal has not yet been finalised because its domestic partners are reassessing the firm’s valuation.
“Financials from 2019 may have led the sellers to reassess the valuation,” Z-Ben said in a report released last week.
According to Invesco’s latest financial report, Invesco Great Wall’s operating revenues increased 88% to $157.2m in 2019, while operating income surged 146% to $76.5m.
“Driven by strong performance and subsequent flows into both fixed-income and balanced funds, Invesco will surely hope to maintain comparable growth once the shareholding transaction is inked,” Z-Ben said.
Invesco Great Wall was the third best-selling Chinese domestic firm in 2019, with net inflows of $9.8m during the year, according to a Broadridge Financial report. In Asia-Pacific, including Japan and Australia, it ranked seventh in terms of inflows.
In terms of competition, Invesco believes that its joint venture is in a good position.
“They really do have a wonderful position in the market right now,” Loren Starr, Invesco’s chief financial officer, said during the earnings call.
“[This] has allowed them to be able to launch products probably more rapidly than others just because they’re seen as being experts in this area when regulators are looking at who is equipped to do these product launches,” he said.
