DLF Pramerica AMC to roll out first product in '09, break-even in 5 years

DLF Pramerica, which got an in-principle approval to set up an asset management company (AMC) from the Securities and Exchange Board of India (Sebi) this week, expects to break even within three to five years in the business.

The market regualtor will give its final appproval within six to nine months. “The team will be in place by March 2009 while the first product would be rolled out eight to nine months from now. Within three to five years, we will have a reasonable presence. This includes a strong retail distribution team,” said Vijai Mantri, director of DLF Pramerica advisory.

The asset management business will have India’s largest realty player, DLF, and Prudential Financial Inc (PFI) of the United States as sponsors.

PFI is the majority shareholder in the joint venture with 61 per cent, while DLF will own the remaining 39 per cent. Pramerica is the brand name used by PFI in India and other select countries.

The asset management business will have a capital base of $45 million and will be based in Mumbai. DLF Pramerica Mutual Fund is a sub-brand under the umbrella brand of DLF Pramerica.

While it may be a surprise to some that both sponsors of the fund come from sectors that have been severely hit by the credit crisis in the US, Mantri opines that the crisis has hit all segments.

“So why should that be such a problem? Both DLF and PFI are committed to building a long-term business in India and provide above-average returns to customers,” said Mantri, adding the markets would take a turn for the better in eight to nine months, when they would launch their first product.

The mutual fund industry in India, in recent times, has seen a wave of redemptions especially in the debt schemes.

Last week, Religare-Aegon AMC, which had recently started operations, acquired Lotus India AMC. The latter has begun operations in 2005. Mantri feels this would be a positive sign for some of the newer AMCs.

Though the primary objective is to grow the business organically, he said DLF Pramerica would look at the inorganic growth route also and there were AMCs available in the market right now. The aim would be to look out for AMCs with a long-term track record, a solid distribution tie-up and a good investment team.

While DLF Pramerica is still on the lookout for office space in Mumbai, Mantri believes this is a good time to set shop in India.

“Existing AMCs with a 5-10 year track record may be incurring cash losses simply because the cost structure for them has gone up. Their expansion plans may have been made assuming the market will give a higher return.

“However, for us, we will not participate in this cost structure. Rentals have fallen and so has the people cost. So this is really the best time to set up a mutual fund business,” said Mantri.

According to a recent McKinsey report, the total AUM of the Indian mutual fund industry could grow to $350-440 billion by 2012, expanding 33 per cent annually. While the revenue and profit (PAT) pools of Indian AMCs are pegged at $542 million and $220 million respectively, it is at par with fund houses in developed economies.

Operating profits for AMCs in India, as a percentage of average assets under management, were at 32 basis points in 2006-07, while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in the same time frame, the McKinsey report said.