Although foreign firms operating in China’s financial services space have been historically restricted to joint-venture approaches, Z-Ben was among the earliest proponents of and consultancies to advise its clients to establish separate legal structures that would enable total control over intellectual property and better protect, train and manage personnel. One of Z-Ben’s earliest clients was also among the first foreign firms to set up such an operation, which specializes in financial services offerings for domestic Chinese clients. With a limited selection of products being provided by Mainland managers, this client wanted to exploit gaps in the market and offer a much wider range of products and strategies to under-diversified domestic investors.
Execution – Operational set-up
A major European asset manager set up in China to support its regional development
With a large market of investors who can only achieve limited diversification in home markets, Chinese retail and institutional customers present a highly attractive yet complex opportunity for foreign firms looking to introduce a greater breadth of funds and financial products than has traditionally been available on the Mainland. Z-Ben Advisors’ client, a European financial services provider, was among the first to use this a novel legal structure to enable both 100% control and greater flexibility over product and service design.
Z-Ben both advised and helped design the legal structure and operational mechanisms necessary to establish a fully foreign-controlled entity. Z-Ben also worked with the client to identify contractual partners who would be able to provide a range of supplemental services, all coordinated through the primary hub of the wholly-owned entity. Z-Ben then assisted the client with creating long-term expansion plans for the operation, focusing on attracting and retaining specialist personnel.
As one of the first fully-foreign operated financial services firms, Z-Ben’s client gained not only added flexibility when operating within China (and an early mover advantage) but was also able to exploit expertise developed for the Mainland operation to support existing fund products in its home market, providing better performance and stability for existing customers while giving them added diversification through well managed access to Chinese equities and fixed income markets.
Execution – Valuation and acquisition
A North American investment holding company bought into the Chinese investment management industry
A North American investment manager and holding company sought to participate in China’s fund management sector by acquiring part of a domestic manager and holding that equity as a passive investment. The long-term potential of the mainland fund management industry was and remains significant. The holding company retained Z-Ben Advisors to conduct an assessment of public fund managers and, after narrowing the potential list of acquisitions, Z-Ben conducted extensive due diligence and valuations on each of the firms. Eventually, the holding company purchased a large stake in one of China’s leading public fund managers. Later, Z-Ben Advisors was retained to monitor the progress of the investment and conduct annual valuations to determine its value.
China’s public fund management industry AUM reached USD1tr in 2015, without any support from defined contribution pension programs contrast to most other large investment markets. Joint ventures and domestic asset managers are given the maximum degree of flexibility in the types of products they create and clients that they are able to target. This freedom can make the largest domestic managers a highly attractive investment option.
Z-Ben identified which firms within the Chinese asset management industry could have been most attractive for acquisition, given market conditions and financials. After the choice of investment target was selected Z-Ben supported the client in initial negotiations with both the target firm and regulators to ensure that the deal was executed smoothly. Finally, a formal valuation conducted for the client allowed it to acquire a significant stake at a fair market value.
The client remains one of the largest foreign shareholders within the Chinese asset management space, and significant dividends have been paid out since the acquisition. Fundamental valuation of the stake has also increased materially since acquisition, providing strong gains upon divestment for the client, should it choose to do so.