Can China entrants make access to coveted markets pay?

BOX: STRUCTURES AND HISTORY

Strictly speaking SJVs go back to Morgan Stanley’s involvement in CICC in 1994, but since that has long since become just an investment for Morgan Stanley rather than something in which the US bank can exert any management control, it’s more common to think of the SJV era starting with the Goldman and UBS ventures. (CLSA’s venture, China Euro Securities, is a different case again – see box). These are widely considered the modern pilot schemes: a tentative and in some cases complicated concession by China to allow foreign participation in local securities.

Nothing about getting these things off the ground was straightforward, in particular the Goldman deal. Zhang Xing, chief executive officer of Gao Hua Securities, recalls meeting 40 government ministers in 10 ministries to get it approved and getting sign-off from all of them. One observer calls it “the single most lobbied against broker in China,” both from rival foreign houses, local brokers, and conservative elements within the regulators themselves.

Even today, five years after the venture’s foundation in 2004, it’s a wonky structure, with two separate ventures. One, Goldman Sachs Gao Hua, contains the investment banking businesses such as underwriting and advisory; this one has Jin-Yong Cai, a longstanding Goldman man and a veteran of the establishment of the Morgan Stanley/CICC venture, at the helm and is owned 33% by Goldman Sachs and the remainder by a separate venture, Gao Hua Securities. The latter is the venture that holds the research and broking side of the business, and is owned by a consortium including Fang Fenglei, the well-known China dealmaker, and Legend Holdings – meaning that legally Goldman doesn’t own a cent of this entity, although it loaned Fang and his team $97.5 million to capitalize it. Fang was at first in charge of the venture, but left last year for private equity, although he remains an apparently active and highly vocal chairman. (A side story is whether Fang’s departure – taking some key staff like Richard Ong with him – was bad for Goldman, given the man’s peerless contact book, or good in that it allowed it to move to a less one-man-centric model than it previously had.) Goldman also had to “demonstrate its commitment”, as the SEC filing put it, by committing $62 million to an unrelated insolvent securities firm.

UBS entered in 2006 by taking over a new securities company created from the flagging local brokerage Beijing Securities. UBS holds 20%, the IFC 4.99%, and local institutions and investors the rest. Both UBS and Goldman naturally plan to up their stakes when legislation allows; “We have an arrangement in place that allows us to transfer that ownership when the law says we can,” says Keogh. “That arrangement is crystal clear. Always has been.”