R-Cap to sell 26% to Nippon for $300 mn today

At 7% of AUM, it could be one of the most expensive deals in the space.

Reliance ADAG’s mutual fund arm, Reliance Capital Asset Management (R-Cap), is expected to announce the sale of 26 per cent stake to Japan’s Nippon Life Insurance Company tomorrow.

The stake is likely to fetch the country’s second-largest asset management company around $300 million (Rs 1,511 crore, at 50.37 against the dollar), valuing the business at a $1.2 billion (Rs 6,044 crore). In December, the average assets under management (AUM) stood at Rs 84,299 crore (about $17 billion). The valuation of the company is 7.11 per cent of total assets. R-Cap officials declined to comment on the issue.

This would be the second stake sale in the company. In 2008, hedge fund manager Eton Park Capital Management bought 4.76 per cent stake for Rs 501 crore, paying the fund house 13 per cent of its AUM.

Though there has been almost a 50 per cent drop in the valuation of Reliance’s asset management company, it is much higher than the deals in the industry in the last couple of years. Goldman Sachs bought Benchmark Mutual Fund at a reported amount of Rs 130.5 crore, giving it a valuation of 4.1 per cent of assets. In September 2009, L&T Finance bought DBS Chola Mutual Fund for Rs 45 crore, or 1.5 per cent of assets. The only deal that comes close to such valuation is IDFC’s purchase of Standard Chartered Mutual Fund in 2008. The company had paid Rs 831 crore, or 5.7 per cent of assets.

Though HDFC Mutual Fund is the largest player in terms of assets, in 2010-11, Reliance emerged as the most profitable mutual fund company, with a net profit of Rs 261 crore, while HDFC reported a net profit of Rs 242 crore.

In the mutual fund segment, deals are valued on the basis of the asset mix of a fund house, the network strength, long-term earnings prospects and profitability. Typically, the higher the amount of equity AUM over the long term, the more is the valuation. This is because equity mutual fund schemes earn better commissions, compared to debt and other fund categories, in a given tenure.

The deal has been brewing for several months. Last October, Reliance Capital concluded its 26 per cent stake sale in Reliance Life Insurance to Nippon Life Insurance for Rs 3,062 crore, the largest foreign direct investment in the country’s financial services sector. Since then, both the parties have been exploring ways to consolidate the association through collaboration across all financial services businesses.

“Nippon Life will be evaluating collaboration opportunities, including strategic partnership, across all R-Cap promoted financial businesses,” the companies had said in a joint statement last September. Nippon Life has around $600 billion of investments globally.

In India, there are 43 players in the fund industry, managing an average AUM of Rs 6.8 lakh crore. However, of these, only a quarter of these are recording profits. The top five fund houses account for a lion’s share in industry’s overall profitability.