International Joint Ventures Lose Luster
June 4, 2001
After a record number of cross-border joint ventures between fund managers was announced in 1999, the number was cut in half in 2000, according to Cerulli Associates of Boston. Twenty-six joint ventures were announced in 1999, and it is unlikely that there will again be such a high number, according to Cerulli. Thirteen were announced in 2000, Cerulli said.
"The reduction [in joint ventures] has been in part a reflection of the growing realization that [joint ventures] do not always work but equally a growing glasnost in many international markets - precluding the need for such (often unstable) alliances," according to the report.
Cerulli defines cross-border fund management joint ventures as alliances between two or more asset managers from different countries that create a separate business unit, are designed to obtain assets for discretionary management, and which include no partner that owns more than 80 percent of the equity. Usually they are alliances between American or British fund companies with those in emerging markets, according to Cerulli. Last year, 70 percent of the joint ventures announced focused on Asia and Africa, with three in India and China, two in Korea and one in Japan, according to Cerulli.
"If you look at where the bulk of them have taken place, traditionally it's been Asia," said Shiv Taneja, a consultant in Cerulli's London office. "That's been for two reasons, one cultural and the other legal. Oftentimes, companies from the U.K. or the U.S. or from the Western world find that it makes more sense for them to enter into a joint venture, whether it's in Latin America or in China or in Asia or parts of Africa, mainly because they don't understand the marketplace, they don't understand the language or the ways of doing business there. The other reason has been, legally, some countries don't actually let you set up a 100 percent [foreign] owned company. Therefore, you need to do a joint venture."
India, for example, makes it extremely difficult for international firms to set up ventures there, according to Cerulli. While it is not impossible, it is very expensive and often makes much more sense to engage in a joint venture there, according to Taneja.
There were no joint ventures announced in 2000 that targeted Europe, according to the report. Fund managers entering Europe believe that recently-adopted rules concerning UCITS (Undertakings for Collective Investment in Transferable Securities) - funds that can be sold throughout the Common Market - reduce the need for joint ventures because they make distribution throughout Europe easier, according to Cerulli. The fund management centers of Luxembourg and Dublin account for over $850 billion of UCITS assets and are expected to have double that in the next five years, further reducing the need to enter into local European markets, according to Cerulli. Also, increasing alternative distribution methods such as fund supermarkets are reducing the need for joint ventures. (MFMN 5/14/01)
One of the reasons for the movement away from joint ventures is that many of them simply have not worked, according to Cerulli. As of the end of last year, 39 percent of the more than 160 joint ventures that have been created since 1979 and monitored by Cerulli were defunct, according to the report. In 1998, that number was only 26 percent.
Also, fund management companies are entering overseas markets more through acquisition than through partnerships recently as companies are trying to maintain as much control as possible, according to Taneja.
"There are two ways to look at a new venture," said Taneja. "One is you start [a joint venture] up from scratch and set it up yourself. That can take a lot of time and money. Sometimes it seems to make a lot more sense to go in there and look at a company that's doing well and try to buy it ... Acquisitions allow you greater control. Obviously, you have better control by acquiring a company than setting up a joint venture."
Another reason for the decrease in joint ventures has been overall consolidation in the asset management industry, according to Taneja. For example, one of the oldest and most successful joint ventures, Rowe Price-Fleming International, a 50-50 partnership between T. Rowe Price Associates of Baltimore and Robert Fleming Holdings of London came to an end when Chase Manhattan Corporation of New York bought Fleming and then merged with J.P. Morgan of New York. The partnership was abandoned and T. Rowe Price bought the 50 percent of the venture that it did not own, according to Cerulli.
"The whole focus of Fleming's was changed," said Taneja. "Maybe the Chase guys didn't want to stay with the joint venture. The requirements of business at that point in time change ... There are lots of examples like that, where one of the partners in the joint venture is acquired by someone else and they say, Look, our priorities are now different. Maybe we want to go do it on our own, or we're not particularly interested in that market at this point in time,' or a hundred other reasons. That's one reason why joint ventures are inherently unstable."
The number of joint ventures formed in a single year will not return to that of 1999, but companies will continue to enter into joint ventures, according to Cerulli. In countries such as India, where setting up an operation alone is very expensive, and China, where fully-owned foreign ventures are not allowed, fund managers will continue to look at joint ventures as an option for market entry, according to Cerulli.