Post-Lehman crisis, minority stake deals in MFs fail to boost assets

Interestingly, sector sees deals at higher valuations despite shrinking assets of similar tie-ups in the past

At a time when recent minority stake sale deals inked at higher valuations may have provided much-needed grease to the stagnating wheels of the Indian mutual fund industry, similar transactions in the post-Lehman crisis period appear to have gone haywire as far as assets under management (AUM) are concerned.

For instance, in July 2009 when Japanese asset management company Nomura picked 35 per cent stake in LIC Mutual Fund, the latter managed average assets of Rs 32,415 crore and was the seventh largest fund player in India. However, till the deal was concluded, LIC MF lost 40 per cent of assets — declining to Rs 18,695 crore.

Interestingly, the free-fall in assets did not stop even after the conclusion of the deal during the January-March quarter of FY2011. The joint entity under the name LIC Nomura Mutual Fund had an average AUM of Rs 11,195 crore as on March, 2011 which got almost halved to a mere Rs 5,799 crore as on March 2012. This pushed the fund house beyond the top 15 players to 18th position.

LEHMAN EFFECT

* Japanese asset manager Nomura announced picking up 35% stake in LIC MF in mid-2009

* Since announcement, till deal closure, LIC MF lost 40% of its average AUM

* After deal closure, LIC Nomura MF lost almost half of its assets pushing it to the 18th position from among the top ten fund players in India

* In early 2010, T Rowe Price bought 26% stake in UTI AMC

* Since then, UTI's average AUM fell 21% and the fund house slipped one notch to be the 5th largest fund player

* Recent minority stake deals involve higher valuation in the range of 6-7% of assets

* In 2012, Nippon Life picked 26% in Reliance AMC while Axis MF sold 25% to Britain's Schroders

Ranbir Datt, chief marketing officer, LIC Nomura Mutual Fund, says, “RBI issued guidelines in 2011-12 for banks to limit their investments in debt funds of mutual funds to not more than 10 per cent of their networth. Unlike other AMCs, LIC Nomura MF had around 85 per cent of their AUM in these funds.Thus, the impact of withdrawal of banks was significant in LIC Nomura MF as compared to other AMCs.”

Six months after Nomura announced their plans to take a stake in LIC MF, another deal followed. Baltimore-based T Rowe Price bought 26 per cent in UTI AMC in January, 2010. UTI AMC had an average AUM of Rs 74,510 crore and was India’s fourth largest fund house. However, as on March, 2012, the fund house’s assets stood at Rs 58,992 crore, a decline of 21 per cent.

When contacted, the spokesperson of UTI, said, “UTI MF has no comment on the matter.” After remaining without a chief executive officer (CEO) for over a year, recently the chief marketing officer of the fund house, Jaideep Bhattacharya, also put in his papers.

In both cases, AUM of these entities have shrunk considerably since announcement of the deals. The overall industry’s average AUM declined marginally by less than a percentage point over the last two years.

Aditya Agarwal, managing director at Morningstar India, says, “These foreign players have a long-term approach for building assets. Building assets take a lot of time and we cannot draw a conclusion between these tie-ups and asset erosion. The fall in assets is mainly because of pretty bad market conditions.”

These deals had surfaced at a time when industry was in deep trouble. Nevertheless, parties involved in these transactions were optimistic of reaping benefits from the expertise of their respective new partners. But AUM, considered one of the important factors for growth, could not be prevented from falling.

And, it is not that the industry has managed to wriggle out of trouble. Rather, it has worsened. Despite this, yet another Japanese firm, Nippon Life, entered the Indian mutual fund space by picking up 26 per cent stake in Reliance AMC while Axis AMC pulled in Britain’s largest asset manager, Schroders, which bought a 25 per cent stake.

Interestingly, the difference in the former and the latest deals is the valuations being offered by the acquirer. While Nomura and T Rowe Price offered a valuation of between 2.5 and 3.5 per cent of assets to their respective targets, Reliance MF and Axis MF ended up inking handsome deals of between six to seven per cent.

Once again, entities involved in the latest transactions sound optimistic. Though they admit the situation is unlikely to improve soon, they continue to have positive views from the long-term perspective. Lester Gray, chief executive officer, Schroders (Asia Pacific), says, “We believe that the long-term prospects for the asset management industry in India are very positive. However, we do recognise that right now the markets are quite difficult and challenging.”