China's $350 billion mutual funds industry may be stumbling due to a sliding stock market and fierce competition but that has not stopped new foreign entrants from paying hefty premiums -- double of what they are offering in India, in some cases -- to get their toes in.
Lured by long-term growth prospects in Asia's second-biggest fund market -- estimated by some to hit $10 trillion in less than two decades -- foreign investors such as Power Corporation of Canada and Japan's Mitsubishi UFJ Trust and Banking Corp have recently struck deals with Chinese money managers.
Some of those deals were priced at more than 8% of the target firms' assets under management (AUM) -- three times more than valuations for similar deals five years ago.
"It's a tough time for China's fund industry, but foreign investors are betting on the long-term growth potential in the world's fastest-growing major economy," said Howhow Zhang, head of research at Shanghai-based consultancy Z-Ben Advisors.
"On the other hand, in their home markets, there's little or even negative growth, so China has naturally become important strategically."
Zhang forecast China's funds industry could swell to $10 trillion by 2030, boosted by rising wealth and possible policy incentives that would channel more of China's massive savings and state pension funds into the capital markets.
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The pricing of the recent deals also represented a huge premium from a global perspective. In mature markets, deals are often priced in a range of 2-4% of AUM and even in hot emerging markets such as India, valuation has fallen now to about 4%.
The valuation trend is at odds with the rather subdued picture of the fund industry in China.
Assets under management has stagnated at around 2.3 trillion yuan in the past three years, even as the number of mutual funds more than doubled to around 890 during the period. Around 55% of the total assets are in equity and balanced funds.
Competition intensified among fund managers to attract and retain investors as China's stock market tumbled 22% in 2011 following a 14% slump during the previous year.
But a few factors are keeping valuations buoyant. Limited options for partnerships in China as well as lengthy approval procedures for new entrants are significant ones.
Then, there is the hope that local money managers would be allowed to list. Several major fund houses, including Bosera Funds and China AMC have been preparing for public share sales as they await policy changes, a source with knowledge of the situation told Reuters.
Also, acquiring a stake in an existing fund house is seen by many as a more efficient way of accessing China, compared with forming a joint venture from scratch, where building a brand and growing market share may take years.