After a slew of low-valued deals after the Lehman crisis, the domestic mutual fund (MF) industry is once again seeing deals at good valuations.
Despite, short-term hiccups, untapped opportunity in asset management business in India is attracting foreign players who are betting on the long-term potential.
At a time when the fund industry has been crying foul over regulatory tightening, bad market conditions and investors fleeing out, recent transactions are being done in the range of six to seven per cent of assets under management (AUM).
Japan’s Nippon picked up 26 per cent stake in Reliance AMC in January, offering a valuation of 6.64 per cent of the fund house’s AUM. Last week, Britain’s largest asset manager Schroders, bought 25 per cent stake in Axis AMC, broadly in-line with recent valuations.
Independent industry experts say the debt-equity mix is one of the main criterion for valuing a fund house. Dhirendra Kumar, chief executive officer of Value Research, says, “Apart from equity assets, profitability and distribution networks of fund houses are also being considered for arriving at valuations.”
For that matter, acquisition of Fidelity’s MF business in India by L&T AMC in March is also estimated to have happened at 6-6.5 per cent of AUM. This was mainly on account of the substantial equity assets Fidelity possessed. Compared with 2008-11, a stagnating period which saw deals valued between 1.5 and four per cent of assets, current valuations have move up. Industry experts had at that time blamed the entry load ban for lower valuations of Indian fund houses.
Since expense ratio for managing equity assets is high compared with debt, valuations tend to go up for deals involving higher equity assets.
According to Lester Gray, chief executive officer, Schroders (Asia Pacific), long-term prospects for the asset management industry in India are very positive. “We are not short-term optimistic that things are going to change immediately, but we do believe over the time India will become an important asset management market in the region,” he adds. He says bad times will change and when it happens, the growth opportunity will reassert itself. “And unless you have established a strong presence, you are not going to benefit by the next upswing in growth,” he says.
|DEALS IN MUTUAL FUND INDUSTRY |
|Acquirer ||Target ||Stake (%) ||Valuation (% of AUM) ||Year |
|Nippon Life ||Reliance AMC ||26 ||6.64 ||2012 |
|Schroders& ||Axis AMC ||25 || |
|L&T Finance& ||Fidelity (India) ||Complete |
|6.2 ||2012 |
|Bank of India& ||Bharti Axa ||51 ||4 ||2011 |
|Goldman Sachs& ||Benchmark ||Complete |
|4.1 ||2011 |
|L&T Finance ||DBS Chola ||Complete |
|1.55 ||2009 |
|Nomura ||LIC AMC ||35 ||2.5 ||2009 |
|IDFC ||StanC MF ||Complete |
|5.7 ||2008 |
|Robeco ||Canara AMC ||49 ||10.45 ||2007 |
|Pioneer& ||Baroda AMC || |
|10 ||2007 |
|& Valuation estimates by industry sources Source:Asset management companies |
Since MFs as financial investment products have very less penetration, a strong distribution channel is the biggest factor for high valuations. Dhruva Chattterji, senior analyst at Morningstar India, notes, “If a fund house has readily available distribution network, it will end up getting a good valuation.”
This holds true. For instance, in case of the Nippon-Reliance deal, the foreign entity could leverage on Reliance AMC’s established distribution channel. Similarly, Schroders will get benefits from Axis Bank’s branches across the country. Distribution channel has gained importance as MFs still continue to be a push product.
Prior to these high-profile deals, Goldman Sachs had bought out Benchmark AMC at a valuation of 4.1 per cent of assets in 2011. Similarly, a deal between Bank of India and Axa Investment is estimated to have happened at around four per cent of assets. Back in 2009, L&T Finance bought out DBS Chola at a valuation of 1.55 per cent of assets, while Nomura had picked up stake in LIC Mutual Fund at around 2.5 per cent of assets.