The boom in the economies of many Asian countries is creating opportunities for Western financial firms that hardly existed a decade ago, according to two keynote speakers at the recent Wharton Asia Business Conference.
Thanks to their double-digit growth, the developing Asian economies, led by China and India, are minting new millionaires seeking managers for their money, said Renato de Guzman, CEO, ING Private Bank-Asia. They are also giving birth to new firms that are seeking merger and acquisition advice as they expand at home and abroad, added Helge Weiner-Trapness, a managing director in Asia with JP Morgan.
“Asia is a great opportunity for the simple reason that the rate of growth in the number of high-net-worth individuals is higher than in the rest of the world,” de Guzman said. The economies are expanding “at above average rates and should continue to do so, and the regional currencies are appreciating against the dollar. So the outlook remains positive.”
Burgeoning economies translate to swelling bank accounts. According to a report by Merrill Lynch and Capgemini, the number of people in the Asia-Pacific region with $1 million or more in assets, excluding their homes, rose 8.6% in 2006, reaching 2.6 million. Asians also tend to save more than their Western counterparts, enabling them to invest a greater share of their incomes. At the same time, countries like China and India are relaxing legal restrictions on where their citizens can invest, increasing the pool of available assets. China, for example, is experimenting with letting people invest in Hong Kong’s financial markets, de Guzman said.
His company, a division of the Dutch banking giant, specializes in catering to the newly rich in Asia. He has found that ING’s new clients in the region exhibit different characteristics from those in the United States, Europe and the Middle East. “It’s a young, entrepreneurial population,” he noted. “They tend to be risk takers because they have built their own companies. So they want portfolio performance as opposed to wealth preservation.”
They also tend to be more drawn to debt than clients in the developed world and Middle East. “In Switzerland, a rich person will say, ‘I’m rich. I don’t need any loans,’” de Guzman said. “But in Asia, he will say, ‘If you don’t give me loans, I won’t bank with you.’” ING has been able to roll out products that combine features of debt and investment products, such as loans that the borrower then uses to buy life insurance.
ING has chosen to organize its Asia private bank differently, too. “The traditional Swiss model of private banking emphasizes service and confidentiality,” de Guzman noted. “But that doesn’t contribute to performance and is less valued among the newly wealthy in Asia. And the American brokerage model tends to emphasize equities instead of total wealth management. In the Middle East, you will see more of a European model, with more family offices and professional managers handling the money.”
To deliver the higher returns that Asian clients seek, ING’s Asia private bank offers a more aggressive asset mix. “The traditional model is cash, investment-grade fixed-income securities and equities,” de Guzman said. “But in Asia, we’re using high-grade and high-yielding fixed-income assets as well as alterative investments like venture capital.” Some firms, he added, offer the same sorts of money management products to both individuals and institutions as they try to woo Asian clients. He said he regards that as a mistake. “The private banking client has a shorter time horizon and cares more about absolute performance.”
Moving at Warp Speed
Investment banking in Asia is evolving just as rapidly as private banking, according to Weiner-Trapness. “Over the last five years, the amount of M&A in Asia is up four, almost five, times. At JP Morgan, we have doubled our investment banking advisory fees over the last two years. You are seeing an industrial revolution taking place, and it’s taking place at warp speed. China and India are pulling the carriage, but it’s broader based than just the two of them.”
Over the last decade, the sorts of deals that investment bankers can pursue in Asia have changed, and that has forced them to revise the way they arrange their businesses, according to Weiner-Trapness. In China, for example, much of the early business focused on helping state-owned enterprises privatize or spin off private or quasi-private subsidiaries. “Political decisions were being made at the top levels, and all you needed to operate efficiently was one or two ‘princelings’ who were well-connected with the people at the highest levels of the government” in Beijing, Weiner-Trapness said.
Today, most of those deals are completed, and the remaining Chinese state-owned enterprises are likely to remain private, either because they operate in politically sensitive sectors or aren’t sturdy enough to thrive in the public market. These deals are being replaced by mergers and acquisitions done by the private companies that are springing up all over the country, he pointed out. To manage this sort of deal flow, an investment bank needs “many more feet on the ground in the 30 or 40 top cities.”
As China’s companies grow, their M&A ambitions are expanding as well. A decade ago, investment bankers saw mostly Western companies looking for ways to establish footholds in China. Today, they are seeing local companies trying to acquire each other and even expand abroad.
Witness CNOOC’s bid for Unocal. In 2005, CNOOC, a subsidiary of the China National Offshore Oil Corp., China’s third-largest oil company, offered $16.5 billion for U.S.-based Unocal. CNOOC eventually gave up on the acquisition because of U.S. political opposition. But Weiner-Trapness predicted more international deals from growing Asian firms in the future.
Two challenges for investment bankers in Asia are cultural impediments to deal-making and lower fees. “You encounter cultural biases against M&A that you don’t see in Europe and the United States,” he said. In Asia, executives’ social standing is tied up with their jobs to a greater extent than in the West, which can make it tough to persuade them to sell their firms. “I had one CEO tell me, ‘I know my stake is worth $1 billion, and I could sell out. But if I do that, I’m just a rich guy with no position.’”
An even bigger challenge is the imbalance between what Asian companies are willing to pay to do mergers and acquisitions and the amount of work that their deals require. “The fee levels are half of what they are in the U.S. and Europe, but the deals take twice as long,” Weiner-Trapness noted. In addition, “there is a high infant mortality rate with deals. Deal size also tends to be smaller and therefore you end up with lower productivity levels per banker. But the deal flow is phenomenal — just as sophisticated as London or New York.”
Weiner-Trapness predicted that many Asian deals would continue to percolate, despite economic tremors in the United States, which still receives the bulk of Asia’s exports. “Asia will be relatively isolated from what’s going on in the United States. It has minimal exposure to subprime. The more fundamental issue is how much the growth engine depends on exports to the U.S. That’s changing. A significant amount of the business we see is companies that are providing products for domestic Asian markets.”