Eton Park sitting on 58% notional loss

Eton Park, the global fund management house floated by former Goldman Sachs star Erich Mindich, is sitting on a notional loss of $73 million or 58 per cent on its investment in Reliance’s mutual fund business. The change in profit outlook for the industry, driven by lacklustre equity markets and crippling regulatory changes, have led to this value erosion, say analysts.

“In November 2007, global fund management house Eton Park bought 4.76 per cent equity stake in the asset management company, valuing Reliance Capital Asset Management at Rs 10,521 crore. The transaction was at a significant premium to similar deals in the asset management space, unlocking substantial shareholder value,” the Reliance Capital Annual Report for the financial year 2007-08 said.

Eton Park describes itself as a global multi-disciplinary investment organisation, dedicated to delivering superior risk-adjusted returns over a multi-year period. Eton Park currently manages approximately $13.0 billion and has offices in New York, London and Hong Kong, said a release announcing the fund’s investment in JSW Infra in 2010.
 

LOSING GROUND Lacklustre equity markets and crippling regulatory changes led to value erosion
Eton Park’s investment in Reliance MF in 2007	Rs 501 cr
Exchange rate (USD-INR in Nov 2007)	$1 = Rs 39.63
Value in $ mn	126.42
Nippon Life investment ( $ mn)	290.00
Valuation of Reliance MF ( $ mn)	1115.38
Value of Eton stake today ($ mn)	53.09
Value erosion ( $ mn)	73.33
% Change since 2007	-58.00
Source: Reliance Capital Annual report, BS Research Bureau

An email to a senior Eton Park official did not elicit any response. Reliance Capital Asset Management CEO Sundeep Sikka did not respond to calls on his mobile.

In a press release in December 2007, Reliance Capital said Eton Park invested Rs 501 crore. At the exchange rate of Rs 39 per dollar, this translated into an investment of $126 million. Today, Nippon Life bought a 26 per cent stake for $ 290 million, valuing the fund house at $1.1 billion. At this valuation, Eton Park’s 4.76 per cent is worth $53 million.

In rupee terms, Reliance MF’s valuation has fallen 46 per cent since 2007 from Rs 10,521 crore to Rs 5,600 crore. However, the fall in the rupee, which has lost 23 per cent during the period, has added to Eton’s notional losses.

At the end of November 2007, Reliance managed assets worth Rs 77,765 crore. At the end of 2011, it managed assets of Rs 84,299 crore, a gain of 8.4 per cent.

Rajesh Krishnamoorthy, of iFast Financial Services, said ertain key parameters go into the valuation of an asset manager, in addition to the studying of the profit and loss statement.

“The investor concentration, whether corporate or retail, mixture of assets and longevity of these assets, are key areas that are looked in such deals. This will help valuers determine what constitutes the revenue, how sustainable it is and so on,” he said.

Any change in these parameters between 2007 and now would also affect the valuation significantly, he added.

Analysts also say one cannot get a bull market valuation in a bear market. “Eton’s deal happened at a time when Reliance Capital’s shares were trading around Rs 3,000. Today, it is around Rs 220. The pricing power is different,” said Ajay Pandey of ITI Securities.

According to Pandey, the deal should not be seen in isolation, but in the context of a larger partnership with Nippon Life

“They have also concluded the investment in the life insurance business last year. The deal should be seen as a whole. It should not be seen as a MF deal alone,” he added.

Following the 2008 crisis, the Securities and Exchange Board of India (Sebi) and Reserve Bank of India made significant changes such as the mark to market rules for debt funds and curbs on investments by banks in MFs.

In addition, fund houses are struggling to find an alternative and viable business model, following Sebi’s decision to ban investor-unfriendly entry loads in 2009.