The recent surge in Chinese outbound investment has covered many sectors – from luxury brands to auto, from agritech to real estate – but one sector in particular has been underrepresented relative to the sector’s size: Financial services. This could be about to change, and it could have a shaping impact on the sector worldwide.
A couple of recent announcements could be the early signs of bigger transactions to come. Huatai Securities, a top 5-10 Chinese brokerage, offered US$780 million to acquire AssetMark Financial Holdings. AssetMark provides tools to US financial advisors to help them serve their investor clients better. Adapting this technology to the wild west of financial advisory in China could be incredibly powerful if executed well. But as we have seen over the last 25 years, from the first Morgan Stanley joint venture in China through many, many more examples, creating value from Chinese-international partnerships in finance is not easy.
As always in the US, government approval is needed, and it is still entirely possible that they will conclude that having a Chinese company own the financial tools that some US advisors use is a national security risk. We will see. But the intent is clear – acquire financial sector technology with the goal of turning a domestic Chinese midtier player into a market leader.
Also, recent financial services outbound investments have tended to be in Hong Kong, which is viewed as a lower risk, incremental step out. Citic Securities bought CLSA in 2013 and Everbright Securities bought Sun Hung Kai’s wealth management and securities business. Both deals were less than US$1 billion in size, clearly not a case of betting the institution on a successful outcome.
This week ICBC moved to acquire Barclay’s gold bullion storage facility in London (holding up to US$80 billion worth) through ICBC Standard Bank, which it controls. ICBC is looking to become a larger player in the physical handling and trading of gold with an eye on long-term demand for gold in China. Expect moves into additional commodity trading related businesses.
But despite their size, neither China’s leading banks nor China’s leading insurers have made the big bet to acquire a sizeable international bank. Chinese insurers are being encouraged to invest 15% of their assets abroad. Chinese banks are being encouraged to globalize as part of China Outbound. Moreover, it is clear that their business clients need them to be more global to provide end-to-end services in everything from One Belt One Road projects to basic trade finance.
Organic development will be painfully slow, taking decades to build a presence across the range of countries in One Belt One Road, or to reach critical mass in the challenging markets that Chinese exporters trade with. An acquisition of a bank with established operations across many markets would therefore look potentially very attractive. And with the low valuations of many international banks today, an investment or acquisition would look inexpensive.
Which raises two key questions:
Are Chinese banks ready to run a multinational bank, to handle the multiplicity of local regulatory challenges this will create, to operate with the transparency required, to retain and grow an international management team? Top and mid-level management in the banks, while evolving, still have an extremely “state-owned enterprise” mindset with few internationally experienced executives. It won’t be easy.
Are regulators and politicians outside China ready to have a domestically important financial institution be owned by a Chinese statep-owned bank or insurer? Would they believe a Chinese acquirer would have the skills to turnaround a struggling bank? To sustain an already high performing bank? A high performing bank is much more likely to be the target as Chinese management hasn’t yet the confidence in itself to turn around a struggling foreign institution. Approving either won’t be an easy step for many regulators.
The implications are that any major transaction would need to be extremely friendly with both management teams willing to argue to shareholders, regulators and media that this is a good event for all. The foreign bank would need to be able to argue there would be upside as a result not just of the investment, but also the access that they would acquire in China.
Regulators would need to be directionally supportive in advance, maybe through limitations on the degree of integration between the banks for a period of time, and through the creation of a special governance architecture such as an independent board for the acquired bank.
Handling a skeptical media may be the biggest challenge, and in the end, may be what puts a move off. While Jack Ma of Alibaba and Yang Yuanqing of Lenovo may be comfortable explaining their plans in English to international media, they are the small minority of Chinese CEOs. Chairman and CEOs of state--owned enterprises are used to talking in carefully crafted sentences which intentionally remain ambiguous and are unused to handling follow-up questions that challenge, nor are they prepared to appear on live television and radio, which would be required in this kind of acquisition process.
So perhaps, financial services will remain a step too far for a major outbound deal for the next few years? Despite these challenges, I don’t think this will be the case. There will be bids, but they will be long and complicated. They may not happen, but investors will try.
PS: I noticed a private equity investor complaining the other day that they couldn’t compete against Chinese investors when bidding for assets in basic materials sectors. Apparently Chinese investors have a more strategic, long-term investment mindset and a lower expectation of returns than the private equity firm. So they can outbid a private equity offer. Limited sympathy.
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