Foreign asset managers can crack the French market - but with difficulty. Angelique Ruzicka
France may be renowned for romance, and Paris may still be the most romantic city in the world, but foreign managers should forget about an easy love affair with French investors. History shows that external managers have been unlucky in these long distance relationships, both with institutional and retail prospects.
There is still talk about the difficulties that Fidelity and Fleming had penetrating the French market in the late 1980s and early 1990s. “No foreign fund has been extremely successful. Fidelity changed their strategy several times. There has been success but some lost out when performance was due,” says Gilles Glicenstein, chairman and chief executive of BNP Paribas Investment Partners.
France is a desirable market. Together with Luxembourg, the country accounts for more than 90% of total fund subscriptions in Europe, according to the Association Française de la Gestion Financière (AFG), an industry body. With nearly e2.45 trillion of assets under management at the end of last year, the French asset management industry expanded by 14% in 2006.
The main problem for external managers is that competitive and highly successful banks such as Crédit Agricole, BNP Paribas, and Société Générale are deeply rooted in the French market.
“Foreign asset managers have always had a difficult time cracking the French asset management market, and one of the primary reasons is France’s long history of asset management expertise, much of it residing within the major French banks,” Phillip Silitschanu, director of European research for Aite Group, says.
In spite of this dominance there are still a few ways that foreign asset managers can break into the market. The most expensive way would be through acquisition, which has been done before with considerable success. “France is a very concentrated market and over the last ten years there has been lots of M&A activity. Crédit Agricole bought Crédit Lyonnais and Allianz bought AGF,” says Adrian Bender, head of corporate and institutional mid cap sales at Crédit Agricole Asset Management.
Crédit Commercial de France (CCF) was the first major French bank to fall into foreign hands. HSBC entered the French market in 2000 by buying CCF and through it HSBC also gained Sinopia, CCF’s specialist quantitative asset management business. “Acquisition is a very good way of entering the French market as it is dominated by French banks and insurance companies and it’s very hard to enter,” says Philippe Goimard, CEO of Sinopia.
The latest financial institution in the spotlight for acquisition is Société Générale. Currently, there is speculation that its French rival, BNP Paribas, is keen on buying the bank and its asset management business. This news will not bode well for foreign players still trying to find a route to market. Société Générale has long been sought after and is one of the few viable options left to buy.
“For external managers looking to get into France this is not good news and both of these banks have very good asset management groups. If it goes ahead they would be as powerful as Crédit Agricole who have 30-35% of the French asset management business,” says Silitschanu.
But whether the deal will go ahead is hard to tell. Italian bank Unicredito was rumoured to have made attempts at buying the bank in the past with little success. Even local players have had a tough time of it. “Société Générale went through two hostile takeover bids from French institutions before over the last 15 years but they failed. So it’s not an easy catch and any buyer will need their approval,” says Jean-Louis Juchault, chief executive of Paris-based hedge fund boutique Systeia.
Instead of entering the M&A fray external managers could find it more useful to strike up relationships with major players in France in order to get their products onto their platforms. Traditionally, and particularly after the market downturn of 2000, French investors have been very conservative. They sought safety through simple, safe, guaranteed products, but there are signs that this is starting to change.
A survey conducted by Invesco, a UK asset management firm, into the European asset management industry revealed that hedge funds have become far more popular in France than in any other country covered by the survey. Invesco found hedge funds appealed to French investors because they are interested in their high performance, while also attracted by the relatively low risks they offer.
Previously, French institutions were fiercely closed but more institutions are warming up to the idea of open architecture. “Now that markets have been gaining momentum, investors are looking for newer, more innovative, and sexier products,” says Silitschanu. “Some of the smaller regional banks, notably the smaller French private banks, are beginning to realise that they do not have the in-house expertise that much of their clientele are beginning to demand. These smaller banks, with their limited resources, are starting to look outside France’s borders for firms who can supply these new funds to meet investors’ demands for new products.”
And it’s not just the small institutional managers that are beginning to look at foreign managers. Large players are increasingly embracing open architecture, especially when it comes to alternative products. SGAM Alternative Investments , for example, is using a mix of US and European managers as alpha providers. These include Caxton Alpha Equity, Omega, Renaissance Institutional Equities and New Star European Growth.
Glicenstein believes that open architecture is inevitable, so persistence could be the way forward. “The fact is that banks are very powerful and the system is quite solid, but having said that, these institutions have ambition to make money, so if in-house products don’t sell well, they will go elsewhere,” he says.
Some managers have even made a successful entry without opening an office on French soil. “France has become much more open than it was in the past and I feel competition is as tough as any other European country. A few external managers have done reasonably well, like Schroders, Templeton and Pictet. Some work out of London, otherwise some have small sales offices that they operate out of,” says Francois Bazin, director of commercial distribution for SGAM.
The good news is that you don’t have to be a monolithic institution to be successful in the French market. Small is considered beautiful in France. “If a boutique were to come with a clearly distinguished product they can be very successful,” says Nicholas Faller, global head of marketing at Fortis Investments.
But industry commentators warn that the competition among French boutiques is a force to be reckoned with as well. “The boutiques have taken in a large amount of flows, mostly through the French IFA network that likes them. So this has given the likes of DNCA, Carmignac, Metropole, Gestion and CCR a lot of strength,” says Glicenstein.
“There are a lot of French boutiques that understand the retail and IFA market. As an outsider you would need to come with good products that fit in with the needs of the client,” adds Faller.
However, opinion remains divided on whether little- known boutiques can make it big in France. If a boutique is too small it would be a lot tougher to follow up with high quality client service. “The problem is that managers need to have local reputation that can be followed up with service. It will be hard for external boutiques to develop in networks, but a good way to enter the market could be via multi-managers. You don’t have to be present in France to be picked as a manager in a multi-manager business in France. You just need good performance,” offers Goimard of Sinopia.
If getting onto a multi-manager or fund of funds platform proves fruitless, another way to launch a business in France would be to approach institutional investors directly. Many new mandates have gone out to foreign players, and, unlike the UK and Holland, managers don’t have to approach consultants first as they don’t play as big a role in France. “Ten years ago they [institutional investors] would not have dealt with non-French managers but the larger institutions that are big enough to seek out diversification have no problem going to external managers now,” says Glicenstein.
The state pension fund, Fonds de Réserve pour les Retraites, was the first large institutional investor to start the ball rolling four years ago by awarding foreign managers mandates – and it hasn’t stopped since. This year the e32bn pension fund appointed three new private equity managers: Pantheon Ventures, a private equity subsidiary of US firm Russell Investment Group; New York-headquartered Lehman Brothers; and fund of funds manager Access Capital.
But external managers that are used to landing large mandates could be sorely disappointed with the French market. The only problem with approaching institutional investors here is that there are not as many large players as there are in the UK and Holland. “The French market is unattractive to external managers because they can’t benefit as they do in other markets where there are large institutions handing out big mandates with big fees,” says Glicenstein. And while some investors have looked externally the large French banks still have a firm hold. “They are small and medium sized institutions that have a tight relationship with a bank who will deal with their clearing and settlement and sell them products directly,” says Bender of Crédit Agricole.
Stand out from the crowd
The consensus reached by most industry commentators is that the best way for external managers to break into France would be to find a way to stand apart from the crowd, regardless of whether they are large or small. They need to give clients what they want, and that increasingly appears to be alternative specialist products, at least in the case of institutional investors.
“Institutional investors have started to revisit their asset allocation and are considering reducing equities because equities have done well and they feel it is time to exit. They are now interested in private equity, real estate, and infrastructure funds. And they are also looking at fund of funds and 130/30 products,” says Jean Pitois, head of institutional business for Axa Investment Managers in France.
“There is interest in fund of hedge funds because the level of interest rates and yields are relatively low and institutions are looking for between 7-8% return. France is still relatively small in the fund of hedge funds space but I expect that it will grow, particularly in the institutional market,” adds Faller.
According to Sebastien Danloy, head of sales for Société Générale Securities Services, it’s those that particularly offer private equity and property funds that will make inroads into the French market. “A lot of external private equity players have set up in France recently, including Sagard, Montague, Apax and 3i. There is definitely an appetite for private equity, hedge funds and property funds and they are currently getting all the new business in France,” he says.
On the other hand retail investors have not yet completely warmed up to specialist alternative products. “If you want to be successful on the retail side, people are more reluctant to take on risky products. They would go for an equity product with a bit of protection, such as balanced or guaranteed products. People do not want to take on too much risk and they don’t want to make choices either. Prior to 2000 when the market went down people could choose their own products but now they want the risk profile made for them,” says Faller of Fortis Investments.
Talk the talk
Commitment to the French language is essential to make a successful business in France and this doesn’t mean hiring a couple of French speakers. “Language is very important and sales forces need to be close to the client,” says Faller.
“The French like to see French products sold to them and they like reporting to be done in French.
They are very price driven, demand very high quality of service and don’t like paying high fees,” adds Glicenstein.
While the French market appears closed there are ways into the market. If external managers are prepared to offer something different (in French) to woo investors they are prepared to listen.
“The French asset management industry is growing and there is room for everybody. But you have to add value – French asset managers, large and small, are strong,” adds Bazin.
© fe July 2007