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Opportunity knocks How global asset managers can win in China02 Opportunity knocks | How global asset managers can win in China1 Opportunity knocks | How global asset managers can win in China Executive Summary Chinas asset management market is expected to be the second biggest in the world, and is projected to reach about USD10 trillion by 2025. It stands out as the only at-scale asset management market with double-digit organic growth. The COVID-19 crisis may further extend the growth gap between China and western markets, making China an even more important strategic arena for global asset managers. Foreign managers have long been interested in the China opportunity, but until recently have had limited options for accessing this market, either via a minority joint venture (JV) with a local Fund Management Company (FMC), or a Wholly Foreign Owned Entity Private Fund Manager (WFOE PFM). Both of these options held significant constraintsminority FMC JVs offered limited control over the company, while WFOE PFMs excluded access to the promising retail market. However, this all changed with the 11 Measures 1 announced in 2019. Foreign managers now have access to multiple additional venues to tap into Chinas asset management market, effectively giving them access to all client segments through vehicles in which they can have controlling stakes: 1. There are no longer limits on foreign ownership of FMCs 2. Foreign managers are encouraged to form JVs with local banks, with local banks required to carve out their Wealth Management Product (WMP) activities into separate subsidiaries 3. There are no longer limits on foreign companies share ownership in securities houses and insurance companies, enabling foreign players to establish Securities Asset Management or Insurance Asset Management companies China is a long-term play, and foreign managers aiming to reap its vast market potential must also come to terms with the significant resource expenditure required. 1. opening-of-chinas-financial-sector/ Opportunity knocks | How global asset managers can win in China 12 Opportunity knocks | How global asset managers can win in China With no proven successes and uncertainties along the way, there is no silver bullet. However, there are five good practices foreign managers should follow: For many foreign asset managers, venturing or expanding in China can be daunting. Those with the appetite to do so, and are willing to commit to the market can use these five good practices to help them build a profitable and successful franchise. Opportunity knocks | How global asset managers can win in China Invest in regulatory relationships Relationships with regulatory bodies help to navigate a changing regulatory landscape; leading firms can take active roles in shaping future regulations and policy changes Focus on investor education Healthy growth of the Chinas asset management market will rely on having a mature investor base; leading foreign managers are contributing to investor education, getting them to understand risk-return, and investment time horizons Exploit opportunities in digital distribution innovation The emergence of a variety of distribution channels allows foreign managers to innovate outside bank-controlled mechanisms; leading managers are leveraging data and technology to redefine their relationships with investors Identify a differentiating product or value proposition A differentiated product set is needed to stand out in a crowded market; leading managers are leveraging their strengths in overseas investment, retirement funds, smart beta, environmental, social and governance (ESG) investing, to gain an edge Empower local teams Asset management in China requires strong, on-the-ground personnel; empowered local teams help attract and retain talent, allowing firms to be agile in response to a highly dynamic local market environment 23 Opportunity knocks | How global asset managers can win in China Section 1: The China opportunity continues to grow Asset management firms globally have faced a number of challenges in recent years, including slowing organic growth, fee pressure and increasing costs. In this world of increasingly challenging economics, China continues to stand out as the only at- scale asset management market with continued double-digit organic growth. Consistent with what we wrote in our paper Leadership in Times of Plenty back in 2017, we expect China to be the worlds second largest market by 2022, and to reach about USD10 trillion by 2025. Strong economic growth, increasing personal wealth, and growing fund penetration have driven Chinas asset management market to grow at double-digit rates for many years, but recent regulatory changes around Wealth Management Products (WMPs) are providing another boost, as a large portion of assets from the USD3.1 trillion WMP market are migrating to the asset management sector.4 Opportunity knocks | How global asset managers can win in China Global vs. China assets under management (AUM) & net new flows (NNFs) By Region, 2019 AUM in USD $T, 2020-2024e average NNF as % of BoP AUM 1. externally managed AUM Source: Casey Quirk Global Demand Model, Casey Quirk Analysis Exhibit 1 China is the only at-scale market globally that will experience double-digit organic growth. .accounting for 40% of new assets globally over the next 5 years -2% 0% 2% 4% 6% 8% 10% 12% $0T $5T $10T $15T $35T $40T $25T $20T $30T $45T $40.3T US Europe ex -UK UK China Japan Rest of APAC Rest of World $14.3T $5.4T $3.9T $3.8T $5.7T $6.0T Average NNF as % of Beginning of Period AUM (2020-2024e) 5-Year Cumulative F By Region, 2020-2024 16% 12% 40% 6% 18% UK US Europe ex-UK Rest of World Rest of APAC Japan China -15 Opportunity knocks | How global asset managers can win in China Exhibit 2 Foreign managers have already captured as much as 53% of FMC AUM through JVs, but in most cases are financial shareholders with little control over the JVs Section 2: The door is now fully open Foreign asset managers have been interested in the China opportunity for decades, and many have long- established footprints in the country. Until recently, however, regulations strictly limited the scope of foreign managers participation in the Chinese market. Foreign managers that have established presences in China generally followed one of two routes: minority ownership in an FMC JV or WFOE PFM. Foreign managers have been buying minority stakes in Chinese asset management firms since the early 2000s. Some of these JVs have evolved into successful asset managers, while others have exited the market. As minority shareholders, foreign participants have had little operational or strategic control over the direction of joint ventures. FMC AUM by ownership type 2019, % of AUM, fully Chinese owned vs. foreign-invested JVs Source: WIND, Casey Quirk Analysis 53% 47% JV with Foreign Partner Fully Chinese Owned6 Opportunity knocks | How global asset managers can win in China Share of PFM AUM by ownership type April 2020, % of AUM, local managers vs. foreign managers 1. Includes only AUM of Private Securities Funds Source: WIND, Casey Quirk Analysis PFM 1 Market Share AUM of Foreign vs. Local Managers, as of Apr 2020 0.3% Local Managers Foreign Managers In 2016, the China Securities Regulatory Commission (CSRC) allowed the establishment of Wholly Foreign Owned Entity (WFOE) Private Fund Managers (PFM). The regulation attracted alternatives-focused firms to the Chinese institutional and high net worth (HNW) segments. But many traditional asset managers who hoped to expand their local knowledge and on-the-ground relationships also jumped on the opportunity to set up WFOE PFMs. To date, due to low brand awareness, lack of a distribution networks and customer preference differences, most new WFOE PFMs have failed to raise any meaningful assets. Exhibit 3 WFOE PFMs have grown steadily, but have only a small share of the PFM market at about 0.37 Opportunity knocks | How global asset managers can win in China Exhibit 4 The 11 Measures announced by the Chinese government in 2019 open up new routes for foreign managers to access Chinas asset management market Source: 11 Measures In 2019, the Chinese government introduced 11 measures that bring substantial opportunity for foreign asset managers. For the first time, foreign managers are allowed to fully own FMC, with access to all client segments. The government also WFOE FMC Foreign asset managers can fully own fund management companies from April 2020 Insurance Asset Management Companies Foreign firms can set up its wholly-owned insurance asset managers, and will no longer be limited to 25% ownership Securities Asset Management Companies Foreign firms can take 100% ownership of a securities firm and apply for a wholly-owned securities asset management company Wealth Management Subsidiary Foreign asset managers can now establish majority-owned JVs with wealth management subsidiaries New routes for foreign managers after the 11 Measures encouraged newly established Wealth Management Subsidiaries (WMS) that are owned by domestic banks to partner with foreign managers. This has opened the WMP and local banks distribution networks to foreign firms.8 Opportunity knocks | How global asset managers can win in China Exhibit 5 .effectively, foreign managers now have unfettered access to all segments of the market 1. externally managed AUM, excludes principal guaranteed WMP, trust asset manager, futures asset manager, and other private fund licenses Source: Casey Quirk Global Demand Model, AMAC, WIND, NSSF, China Wealth, IAMAC, CICC, HWABAO Securities, Casey Quirk Analysis Such significant regulatory and industry changes have not gone unnoticed by foreign managers, and they are moving swiftly to take advantage of this growing opportunity. J.P.Morgan has announced its intention to increase ownership of its FMC JV to 100%, and Blackrock, Vanguard and Fidelity have applied for fully-owned FMC licenses. Several asset managers, including Blackrock and Amundi, have announced new WMS JVs with leading local banks. We expect this uptick in activity to continue in the coming months. Addressability for foreign managers China AUM 1 by asset manager type 2019E, % 35% Bank WMP Private Equity Venture Capital Insurance Asset Management Securities Asset Management Private Securities Firms 32% 15% 7% 6% 4% FMC Pre-11 Measures Post-11 Measures Not addressable Addressable through a majority owned JV Ownership capped at 51% Addressable through a WFOE FMC Ownership capped at 51% Addressable with no cap on ownership Addressable through WFOE PFM Addressable through WFOE PFM Addressable through WFOE PFM Addressable through WFOE PFM Ownership capped at 25% Addressable with no cap on ownership
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