China: CLSA acquisition signals Citic’s global intent

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By:
Anuj Gangahar
Published on:

Should strengthen links with foreign investors; Paralleled by HK hedge fund launch boom

Citic Securities has emerged in recent years as the most likely of China’s brokerage companies to succeed globally.

Its agreement to acquire Hong Kong-based brokerage CLSA Pacific Markets from Crédit Agricole for $1.25 billion is a bold statement of intent and underlines its credentials. It is the first large acquisition by a Chinese broker of a foreign competitor. And it serves notice that Citic intends to become a player on the global stage, a development that should have competitors in China and beyond sitting up and taking notice.

Discussions with CLSA began more than two years ago, and the sealing of the deal will come as a relief to both parties. When they first signed an agreement to cooperate in 2010, plans were to establish a 50-50 joint venture headquartered in Hong Kong. The deal went through numerous twists and turns and changes of direction before it was eventually signed late last month.

Under the structure of the deal the corporate and investment bank of Crédit Agricole completed the sale of a 19.9 % stake in CLSA Asia Pacific Markets to Citic Securities for $310 million. It also granted Citic an irrevocable put option to buy the remaining 80.1% of CLSA for $942 million in cash.

Wang Dongming, chairman of Citic, noted that the investment in CLSA would enable the company to add CLSA’s established global client base to its China franchise, bringing Chinese capital markets products and services to international clients.

This is the most important aspect of the deal, giving Citic the ability to compete in a domain that has historically been the exclusive territory of western investment banks: connecting Chinese companies that are looking to raise capital with large, established investors based beyond China’s borders, particularly in Europe and the US.

Immediate market reaction to the deal was muted, with shares in Citic falling on fears that it is paying too much for the CLSA business. Analysts also suggested that the cultural differences between the two firms might prove too difficult to overcome. JPMorgan wrote in a note: "In the long term, this transaction, if successfully executed, could become critical for Citic to compete with international and domestic investment banks. However, the downside risk is execution, particularly given the cultural differences."

Citic has been expected to carry out acquisitions since it raised $1.8 billion in an initial public offering late last year, saying it aimed to spend the bulk of the proceeds on acquiring overseas research platforms and trading networks. For Crédit Agricole and chief executive Jean-Paul Chifflet, the move marks a continuation of its recent balance sheet trimming and cost cutting against the backdrop of a more stringent regulatory regime and pressure on trading and underwriting commission.

China’s largest securities companies exert a natural dominance over the still tightly controlled domestic capital markets. Citic Securities and CICC are the established leaders and their main competition in China comes from other domestically owned brokers rather than foreign firms. Their almost guaranteed presence on every cross-border investment or fundraising deal by a Chinese company means China’s biggest securities companies invariably place highly in the year-end league tables for Asia excluding Japan.

Citic was named as the best investment bank in China in Euromoney’s Awards for excellence this year and was ranked in the top 10 bookrunners for equity capital markets and debt capital markets in the first half of this year, according to data provider Dealogic.

The Citic deal serves as notice to global investment banks that Chinese companies are likely to present an increasingly serious threat over the coming year, particularly with capital market reform in China gathering pace. One such reform means foreign hedge funds are now able to call on some of China’s wealthiest citizens for funds to invest overseas. The reform is known as the Qualified Domestic Limited Partner programme and could pave the way for further growth of the Asian hedge fund industry.

During the first half of this year, as many as 32 funds were launched, attracting over $2 billion in assets, according to a survey by AsiaHedge, the hedge fund publication owned by Euromoney.

Anecdotal evidence suggests that launch activity is set to gather pace in the second half of the year, with a host of long-expected launches by high-quality managers.

 Hedge fund start up assets
AUM by location, H1 2012 
Source: AsiaHedge 

Average launch size remains strong, at $63.25 million, albeit lower than the $110 million in the first half of 2011 but much higher than the $40 million that new fund launches averaged in the first half of 2010.

AsiaHedge points out that Hong Kong seems increasingly to be the centre of choice for new funds in Asia, with 20 fund launches in the first half attracting $1.76 billion in assets. In terms of hedge fund strategies, multi-strategy funds, which can adapt to various market conditions and tend to perform better than others in times of market crisis and volatility, continue to be the most common type of new fund.