BOSTON (Reuters) – The former investment company of U.S. Commerce Secretary Wilbur Ross has been flourishing in China, even as he marshals billions of dollars’ worth of punishing tariffs in America’s deepening trade war.
U.S. money manager Invesco Ltd (IVZ.N) – for which Ross was a senior executive from 2006 until he joined Trump’s cabinet in February 2017 – has become the top foreign manager of Chinese money in China over the past year through its joint venture Invesco Great Wall Management, according to research firm Z-Ben Advisors, leaping ahead of Switzerland’s UBS (UBS.N).
It is an unlikely success story that Invesco executives say has nothing to do with government policy, but is instead rooted in the company’s decades’ worth of relationships in China.
Invesco maintains managerial control of its joint venture there, despite Chinese ownership limits. Last year the joint venture secured a lucrative 2018 listing on a huge Alibaba Group Holding Ltd (BABA.N) money market platform, where its fund has amassed $14.1 billion in assets.
But American tariffs appear to have helped at least one Invesco steel investment in China, according to interviews and company disclosures.
In late 2017, Invesco, through its private equity arm WL Ross & Co, took a lead role in restructuring bankrupt regional player Chongqing Iron & Steel (601005.SS) with China Baowu Steel Group, also known as Baosteel. The recapitalization of Chongqing was completed in January 2018, just months before the Trump administration imposed 25% tariffs on Chinese steel imports.
Chongqing reported a 71% increase in operating profit in 2018, according to company financial reports. The company said it benefited from reduced debt, Beijing’s mandate to remove excess capacity, and rising global steel prices amid Trump’s tariffs.
Invesco and WL Ross & Co sold their equity stake in Chongqing in late 2018, realizing a 1.6 times return on investment in about 12 months, Invesco said.
Four Rivers Investment Management, a joint venture led by WL Ross & Co and Baowu, China’s largest steel producer by volume, took a 23.5% stake in Chongqing after the restructuring. Invesco and WL Ross & Co were listed as stakeholders in the partnership when Chongqing filed its annual report on March 29.
Four Rivers has up to $12 billion set aside for similar steel deals in China, according to Morgan Stanley analyst Rachel Zhang. She pointed out that given output limits, the only way for Chinese steel makers to grow is through mergers and acquisitions.
Ross founded New York-based WL Ross & Co in 2000, and it has operated as a unit of Invesco since 2006. Ross sold his Invesco shares in December 2017. He said he mistakenly thought he had sold the stock earlier, as he was required to do.
“I discovered that the previously held stock had not been sold. I then promptly sold these shares,” he wrote in a disclosure with U.S. government ethics officials.
When asked in June about Wilbur Ross’ role in leading the United States’ trade war with China, Invesco chief executive Martin Flanagan acknowledged he was uncomfortable talking about his former colleague. He said he had not talked to Ross or Karen Dunn Kelley, Invesco’s former fixed-income chief, who now serves as Ross’ top lieutenant at Commerce, in more than 18 months.
“We have mutually agreed to not spend time with one another just because of the potential perceived issue (of conflicts of interest),” Flanagan said. “I’m very sensitive about it and they are also.”
Ross was not available for comment.
Operating profit from Invesco’s joint venture in China rose 29% to $19.2 million in the second quarter from the previous three months, the company said on July 25. The company said the profit margin on the joint venture was more than 50%.
Invesco Great Wall also reported $35.2 billion in average assets under management at the end of June, 58% higher than nine months earlier. The company’s overall Asia assets surged 13% to $118.6 billion during the first half of the year on net deposits from clients and market gains.
But Invesco’s overall operating profit, including assets outside China, dropped 91% in the second quarter after taking charges related to its May acquisition of OppenheimerFunds from MassMutual.
DECADES IN THE MAKING
Although Invesco’s Chinese steel bet may have gotten a lift from the Trump trade war, Invesco’s executives say its winning play book in China took decades to write.
The company first invested and managed money there in the early 1990s, and has raced ahead of BlackRock Inc (BLK.N), Fidelity International, JPMorgan Chase & Co Inc (JPM.N) and Morgan Stanley (MS.N), among others.
Unlike most U.S. rivals, Invesco manages the joint venture with its Chinese partner, state-owned Huaneng Power International Inc (600011.SS). Each owns a 49% stake, but Invesco has management control.
“This structure enabled Invesco to operate inside a board which was evenly held by the Chinese and Invesco,” said Peter Alexander, managing director of Z-Ben Advisors. “The elevation of the CEO – appointed by Invesco – to the board tipped the scales and with it all but allowed Invesco to run the (joint venture) essentially as a subsidiary.”
Larger U.S. rivals typically do not manage the joint ventures they have with top-tier Chinese financial services companies.
“We didn’t want to be part of a big bank or insurance company. We did not want to be overwhelmed and we wanted to be free of any conflicts,” Andrew Lo, the head of Invesco’s business in the Asia Pacific region, told Reuters in a telephone interview in July.
“We wanted a relationship that allowed us to run the company and build the company from the start,” he said. Huaneng brought deep contacts in Chinese business and political circles, while Invesco delivered money management and investment expertise, Lo said.
The world’s top banks and asset managers have been in China for years, too. But their joint ventures, and limited access to the mainland’s explosive wealth management market, have been a source of frustration.
China is expected to end ownership limits for foreign investors in its financial sector in 2020, a year earlier than scheduled, to show the world it will keep opening up its markets, Premier Li Keqiang said last month.
In June 2018, Invesco Great Wall also scored a coup when its Jingyi money fund was selected to be on the Yu’e Bao money-market platform. Yu’e Bao is an online spare cash management platform integrated with Ant Financial’s Alipay, one of China’s largest digital payment platforms. It has more than 500 million users, according to Ant Financial, a unit of Alibaba Group Holding Ltd (BABA.N).
Invesco CEO Flanagan declined to say how the fund was picked to be on the platform, but said it was related to the company’s presence in China.
“It’s literally decades of constant engagement and then you become an overnight success,” he said.
(This story was refiled to remove extraneous word from lede)
Reporting by Gerry Doyle