Reliance MF IPO may spark consolidation

RNAM, asset manager for Reliance MF, has earmarked Rs 165 crore of IPO proceeds for 'inorganic growt

The proposed initial public offering (IPO) of Reliance Nippon Life Asset Management (RNAM), the country’s leading assets manager, could trigger further consolidation in the Rs 20-lakh crore mutual fund (MF) industry.
 
The IPO, expected before the end of this fiscal year, is looking to raise over Rs 700 crore, part of which will be used for inorganic growth.
 
Of the issue proceeds, RNAM, which is the asset manager for Reliance Mutual Fund, has earmarked Rs 165 crore for “inorganic growth and strategic initiatives”, the company has said in its draft red herring prospectus (DRHP) filed with the markets regulator, the Securities and Exchange Board of India (Sebi), on August 18.
 
The assets manager has set a three-year time frame for potential acquisition.
 
“We also continue to selectively evaluate targets or partners for inorganic growth and strategic initiatives in order to consolidate our market position in existing businesses, strengthen and expand our product portfolio, enhance our depth of experience, knowledge-base and knowhow and increase our branch network, customers and geographical reach,” the company has said in its offer document.
 
Industry players say RNAM will be able to acquire only a small- or mid-sized fund house with the amount it has set aside.
 
“Typically, a fund house is valued at around five per cent of its equity assets and two per cent of its debt assets. The amount the company has set aside isn't very big. However, it can also add to it through internal accruals because the fund house is profitable,” said an industry player.
 
Despite encouraging growth, the domestic MF industry has seen over half a dozen mergers and acquisitions (M&A) in the past few years. A peculiar trend in most of these M&As has been the exit of a foreign player. RNAM itself had acquired Goldman Sachs MF, a passive investment-focused asset manager, in October 2015 for Rs 250 crore.
 
“Going forward, while continuing to maintain organic growth momentum, we intend to explore inorganic expansion as well by leveraging on the experience we have gained through our previous acquisition,” the company said.
 

Industry players say as the growth rate of the MF industry is healthy, the 40-player industry could see further consolidation in the years ahead. “Big players could see snapping up smaller players to add to their presence,” said the industry player.
 
In the DRHP, RNAM gave some hint on the potential acquisition targets. “We also continue to selectively evaluate targets or partners for strategic acquisitions and investments in order to consolidate our market position in existing businesses, strengthen and expand our product portfolio, enhance our depth of experience, knowledge-base and know-how and increase our branch network, customers and geographical reach,” it says.
 
Besides organic growth, the company will use the rest of the issue proceeds for “expanding and relocating the branch network, upgrading the IT systems, advertising, marketing and brand building activities, investment in our subsidiary (Reliance AIF)”.
 
AIF is an alternative investment fund, a new investment vehicle introduced by the Sebi.
 
RNAM is planning to invest Rs 125 crore in its subsidiary Reliance AIF by way of debt. Reliance AIF will subsequently invest such debt proceeds in new AIF schemes, which will be managed by Reliance AIF, as “continuing interest”.
 
Sebi’s AIF rules mandate that a sponsor has to have a “continuing interest”, which must be about five per cent of the scheme’s corpus.