A blooming presence in fresh markets

With fiercer competition fuelled by increased corporate activity in banking and asset management, identifying the right criteria to successfully select new markets for expansion has become a key issue for global and European players. Often, it is a matter of ranking markets according to revenue generation expectations.

“We do prioritise markets,” says Elizabeth Corley, chief executive officer at Allianz Global Investors (AGI) Europe, the entity established to leverage the global company’s product and service expertise across its home continent.

Size and potential of the market are definitely fundamental criteria. But what makes a difference is “how rapidly the market is developing and how open players are to alternative asset managers providing solutions.”

Western European countries are not exactly the fastest growing markets, but Ms Corley emphasises the importance of open architecture as the factor determining a change in market shares between the traditional owned asset managers and “the newer more professional asset managers”, which is not affecting the very top players, but the second tier.

For example, in the relatively mature Italian market, where Allianz operates through the subsidiary RAS group, market shares are shifting at the expense of very top, established players. “We are definitely seeing flow and opportunities with clients there,” says Ms Corley. This development flies in the face of perceived advantage gained by early entrants to the market. “Even if you come into a market after other entrants, it is possible to gain market share. This is because clients are looking for good quality service and solutions,” states Ms Corley.

Market position and having a well-developed domestic client base can also prove a route to success. “France is the most obvious example of how having a strong local presence, plus a strong global product quality as well on top, helps you gain market share,” believes Mr Corley. Having become the seventh largest asset manager in the French market, running ?76bn of client assets, AGI’s market share is growing fast in that country.

But market concentration has to be taken in consideration, as it can prove a barrier to entry. “It would be silly” to try to enter the Spanish market, for example, if you do not have good relationships with Santander and BBVA, says François Bazin, head of European sales at Société Générale Asset Management (SGAM).

Indeed, thanks to established links with the holders of the duopoly, SGAM sources 10 per cent of its total European third party distribution assets – amounting to “tens of billions of euros” – from the Spanish market.

While France is gradually becoming less important in terms of SGAM’s third-party distribution – now accounting for 30 per cent of total third-party assets – Switzerland, Spain, Italy, Scandinavia and the Benelux region are all proving successful, also making up 10 per cent each of the European total.

The pan-European distribution strategy, devised in 2000, put an emphasis on “the large dominant players,” explains Mr Bazin. “We have made good inroads with banking organisations,” he says and lists amongst SGAM’s distribution partners UBS, Credit Suisse and the cantonal banks in Switzerland. In Germany, SGAM has struck deals with Sparkassen and the regional banks, “which have more power than Deutsche, Dresdner or Commerzbank.” In Italy they concentrate on the larger GPFs networks such as CAAM or Intesa-Sanpaolo, he says.

The cost of distributing can also be a discriminating factor, when selecting new markets.

“The pricing structure is a handicap for latecomers, who have to pay larger portions of their fees to the distributors,” says Mr Bazin, highlighting the importance of being an early bird, unlike Ms Corley. Those who do not offer a consistent product range or capacity are also penalised, he says. Although SGAM started late in Europe, they were not the last, explains Mr Bazin. “We also had some blockbuster products, and that helps a lot.”

Looking at New Europe

If the fastest short-term growth in terms of revenue is expected from the largest countries in Europe, it is Central and Eastern Europe which will provide long-term potential, say investment experts.

Some players, such as Société Générale, have been active in the region for over seven years. The advantage of a strong retail banking presence has proved a key growth factor for fund distribution. In Poland, which accounts for the largest proportion of the ?3bn sourced from this region by the French asset management house, most of the sales are channelled through Komerãní banka, subsidiary of the SocGen group and the second largest bank in the Czech Republic, in addition to insurance companies.

It is easier to work with local regulatory authorities through local banks and adapt the product range and language to the market with their help, says Mr Bazin. In general, working with local distributors is advantageous. “We educate them, we organise seminars and we try to build relationships, so when interest rates come down and customers will switch off bank deposits, they will naturally go towards mutual funds. We want to be the early birds,” reiterates Mr Bazin.

SGAM also works with foreign private banks like Citigroup or Raiffeisen as well as foreign insurance companies like ING, Aegon or Allianz, says Mr Bazin.

In the case of Pioneer Investments, the decision to enter Poland in the early-1990s was due to the acknowledgement of the enormous potential of the country and its close relationship with the US. At that time, Pioneer was a US fund company, extending its reach into Europe, the capital markets were developing and time was right for opening up to investment fund products, remembers Angus Stening, chief executive officer of new markets at the global company.

Corley: good solution opportunities would prompt a move

In 1992, Pioneer was the first company to establish a mutual fund in the country, according to Mr Stening. The company now sources from the Polish market almost 70 per cent of the total $8bn (e5.8bn) in assets it manages in the CEE region. The more recently established banking presence of parent UniCredito “opened up another level of distribution that we did not anticipate when we first went to Poland”, says Mr Stening.

Today, 80-90 per cent of Pioneer’s distribution comes from Bank Pekao, owned 53 per cent by UniCredito. This is reflective of the market, says Mr Stening, adding that all the top 10 fund companies distribute through their local banking affiliates.

Pioneer currently has five local asset management activities, operating in the Czech Republic, Hungary, Croatia and Romania, in addition to Poland.

In terms of driving criteria when selecting markets, says Mr Stening, Pioneer looks at identifying those countries that will generate “above average growth in terms of AUM and profit for the group.” And the CEE countries have definitely turned out a good bet in this regard for Pioneer. “Our assets across the CEE region represent around 3 per cent of our overall AUM, but they account for 8 to 9 per cent in terms of profit contribution,” he says.

This is because, in the selection process, Pioneer tends also to look at neighbouring countries where they can enter with minimum investment using existing products and sales forces and scaling up existing operations.

“We leverage our IT infrastructure, our global investment process, our marketing and product development processes,” says Mr Stening.

“CEE has a considerably lower cost of operations than Italy, Germany or the US. Staff costs, recruiting costs and resource are significantly below than in Western Europe,” he says, explaining that in the investment fund business that would be probably one of the biggest cost drivers of any investment firm. “We benefit from leveraging that area.”

Meeting the requests of clients can also be an important driver in selecting markets.

Ms Corley at Allianz says that even if they would have not selected a particular market based on the other criteria, if they think they have good solutions for clients, they would go into that market, knowing that they are going to gain market share.

This has been the case recently for Central and Eastern Europe, where AGI has been operating “in all seriousness” for the last 18 months. “At the moment we are working with a couple of banks in the region, to meet their needs for a more interesting product range,” says Ms Corley “and through that solution to the client we will gain market share.”

Exploring further afield

However, more and more players are looking further afield and have recently increased their focus on the rapidly growing markets of Asia and the Middle-East, with India and China prime targets. Pioneer Investments is one of the latest to have announced a new joint venture in India. The operation which will be managed by Mr Stening who, having been responsible for Pioneer’s presence across CEE in the past three years, is in fact now looking to expand Pioneer’s entry strategy into Asia and emerging markets in general.

Commenting on the latest report from McKinsey, which shows that most of these joint ventures in Asia are far from profitable, Mr Stening says: “We are here to prove them wrong.”

With its track record of running a joint venture with Bank Pekao in Poland, Pioneer is looking to replicate the model with Bank of Baroda, with the plan of building a local production factory in Mumbai. Pioneer expects to be “on the ground” in India, running a joint venture operation before the end of the year.

“The major risk of any joint venture is that both parties don’t share a common goal in terms of where the growth potential or the value creation comes from,” warns Mr Stening, discussing potential hazards. In the specific case of India, although there is very good understanding of roles and responsibilities between the bank and Pioneer, says Mr Stening, “the challenge is going to be mobilising the distribution and training of such a big distribution channel like Baroda, which owns around 2,700 branches.

“We still start to train the trainers, first on the investment products, then on how to sell them. That we will take time but we have got a lot of experience,” he adds confidently.

UBS, unsurprisingly, offers a very systematic approach to the wealth management initiative launched by the firm in 2000.

The five key markets selected for building an onshore presence in the continent, Italy, France, Spain, UK and Germany, covered 70 to 80 per cent of the potential of the region. Today total assets run by UBS wealth management amount to SFr144bn (?88bn).

‘We still start to train the trainers, first on the investment products, then on how to sell them. That we will take time but we have got a lot of experience’ - Angus Stening, Pioneer Investments

Expanding in the selected markets has then been a question of organic growth and acquisitions. “Our DNA is organic growth. We are convinced that if you efficiently grow a company in the market, you also become a good partner for strategic discussion,” says Juerg Zeltner, head wealth management in Benelux, Germany and Central Europe and member of the group managing board at UBS

“But we also look very carefully at bolt-on acquisitions and we always apply three very simple standards.” First, there must be a strategy fit, he says, second the culture must be the same, for example it would be very hard to join with a firm not employing a best open architecture platform. “Third it must make economic sense, because the organic build up is usually cheaper than the acquisition premium,” says Mr Zeltner.

Indeed the growth of UBS in these countries has been marked by bolt-on acquisitions both in the UK and Germany and more recently in Italy in 2005 with the buyout of a financial intermediary firm.

UBS’s wealth management business is gradually expanding into the rest of Europe, although Mr Zeltner remains secretive on the next targets.

“Most of the time you fight for market share, more than just growth,” he says. Asia might be the exception but Europe is growing at 2-3 per cent, he says and according to an internal UBS estimate, the global growth rate of liquid assets held by wealthy individuals is expected to grow by around 6 per cent between 2005 and 2009. “We want to grow two times as fast as the market and you can only do that if you gain market share. In order to do that, you have to differentiate yourself and understand what the local and foreign banks are offering.”

When selecting new markets it is important to analyse the economic underlying growth potential, the structure of the wealth pyramid, the number of wealthy families or entrepreneurs, as well as other key macroeconomic data, says Mr Zultner.

The consultant’s view

But Ray Soudah, founder of Swiss-based Millennium Associates, and one of Europe’s best known independent wealth management M&A and strategy consultants, is quite sceptical on the concept of private banks and fund managers being able to select markets. “In private banking there are no criteria, because private banking, due to the nature of its origins, is not an international business. Clients are international but most private banks are in one or two countries, mainly Switzerland and UK, other than their own country. And outside their own country they have very small offerings.”

Private banks have a presence in those markets where they historically bought a commercial bank, with a private banking subsidiary, as in the case of HSBC and CCF. UBS is an exception, admits Mr Soudah, as the bank grew organically and carried out more acquisitions than competitors. But trying to build a presence in a foreign market is generally tough, so private banks are compromising and buying small companies or IFAs. “Not being able to find another private bank to buy, they use substitutes.”

In the fund management industry, the majority of funds are still distributed in their own market, although cross border distribution is gradually increasing, he says. “Those who have significant international distribution are most likely to have achieved it by making an acquisition in the country or countries in question,” he says.

However, where fund managers have been able to make an acquisition, this is essentially a local company and cannot be called international distribution.

“Acquisition or joint ventures are certainly the most popular option for entering a new market, but currently there are very few important targets available that would make a difference to a firm wanting to enter a significant market place and prices are not cheap,” he concludes.

Deutsche bank claims to break down borders

The private clients arm of Deutsche bank offers a very different approach to selecting the most profitable markets, claims Stefan Kolb, member of the PWM (Private Wealth Management) global intermediary board at the German heavyweight. “We don’t have this country-specific approach, we have a client-focused approach,” he says. “We can service clients from all European markets either onshore or offshore, we have excellent distribution in more or less all countries in Europe, so we do not have to make a decision,” he boasts.

Mr Kolb admits that in those countries, such as Germany, the UK, Switzerland or Luxembourg where they have very well established offers and distribution offices, Deutsche Bank, which has just recently sold its private bank in France, has a higher volume of assets with intermediaries. These can be independent asset managers, independent financial advisers or those simply controlling assets, for example for family offices or trusts.

“But what is important when working with intermediaries is to be able to adapt your solutions to their needs,” he says. “It is very hard to say; “all intermediaries in one market work this or that way.” Asked whether they prioritise selected intermediaries or whether there is a minimum amount of volume business that the intermediary is expected to bring to establish a relationship with Deutsche Bank, Mr Kolb reiterates they have never found this necessary. “Intermediaries are confident that they are profitable in their own right, they tend to have a certain minimum size, so it is a natural selection. I haven’t met an intermediary yet that has no growth potential, and I have been doing this for almost 10 years.”