Mumbai: Japan’s Daiwa Securities Group-owned asset management company Daiwa Asset Management (India) Pvt. Ltd plans to sell its Rs.789 crore mutual fund (MF) assets.
The Japanese company’s move comes on the back of the Fidelity Group’s exit from the Indian MF industry, largely on account of its inability to expand the business in a highly competitive market plagued by regulatory uncertainties.
Three persons with direct knowledge of the development said the fund house is in talks with at least four asset management companies, including State Bank of India-sponsored SBI Funds Management Pvt. Ltd and Chennai-based Sundaram Asset Management Co. Ltd, to sell its Indian fund assets.
“Daiwa is looking for an appropriate buyer for its mutual fund business in India. It has initiated talks with potential buyers. It could be a complete sell-off or a majority stake sale. SBI Mutual Fund and Sundar am Mutual Fund have met Daiwa officials ,” said one of the three persons, who, like the other two, did not want to be identified because the deal is yet to be formalized and the term sheet has not been finalized.
To be sure, negotiations are at an early stage, and a formal shortlisting of the prospective buyers may still be some time away. If SBI Mutual Fund agrees to buy Daiwa’s assets, it will be the first acquisition by a fund house promoted by a state-owned bank.
With average assets under management (AUM) of Rs.50,958.8 crore for the September quarter, SBI Mutual Fund is the sixth largest in the 44-company industry.
Sundaram Mutual Fund had average AUM of Rs.13,668.88 crore for the September quarter.
“As a matter of policy, we do not comment on such market speculation,” Daiwa Asset Management said.
An email sent to SBI Mutual Fund did not elicit a response, and Sundaram Mutual Fund said it has not made a formal bid for Daiwa Asset Management.
An SBI Mutual Fund official said talks are at a very preliminary stage and nothing has formalized as yet.
Daiwa Mutual Fund’s plan to exit the Rs.7.5 trillion Indian fund industry reflects the ongoing uncertainty in the space. Recently, Fidelity Group-owned Indian asset management company—FIL Fund Management Pvt. Ltd—sold its schemes to L&T Finance Holdings Ltd for Rs.550 crore. When the deal was announced, Fidelity’s fund assets began eroding on speculation that L&T Mutual Fund, being relatively new to the business, might not live up to the expectations of Fidelity’s existing investors.
The deal has recently been cleared by the capital market regulator, two persons familiar with the matter said, asking not to be identified.
Acquisitions in the MF space usually result in a significant erosion of assets if the fund house being acquired has a large equity asset base. Those asset management companies that raise money from firms and institutional investors for liquid and fixed-income funds are relatively less affected.
Often, distributors tend to take advantage of such deals by shifting investors from the schemes of the fund houses being acquired to those run by other fund houses to earn commission. Risks of such churn are higher for equity schemes because distributors earn a higher commission on these. This increases the chances of asset erosion, which in turn inflates the effective valuation paid by the buyer of the fund house.
A major chunk of Fidelity’s assets were in equity, while Daiwa’s assets are mostly in liquid and short-term funds. Daiwa Industry Leaders is the company’s only equity-oriented scheme with assets worth Rs.30 crore. The risk of asset erosion for Daiwa is relatively less as the prospective buyers, both SBI Mutual Fund and Sundaram Mutual Fund, have a strong foothold in the industry.
Daiwa Mutual Fund has been conservative and not launched too many schemes. It started its business in the country in January 2011 after buying Shinsei Asset Management (India) Pvt. Ltd in March 2010.
There have been several acquisitions in the MF space with valuations ranging from 1.6% to 13% of AUM. Recently, US-based Invesco picked up a 49% stake in Religare Asset Management Co. Ltd for about Rs.460 crore, valuing the company at 6.4% of its AUM of Rs.14,600 crore.
In January, Nippon Life Insurance Co. bought a 26% stake in Reliance Capital Asset Management Co. Ltd, the second largest, for nearly Rs.1,450 crore, valuing the fund house at around 6% of its total assets. In April, Britain’s largest asset management company Schroders Plc picked up a 25% stake in Axis Bank Ltd-promoted Axis Asset Management Co. Ltd for an undisclosed amount.
In 2009, Japanese money manager Nomura Asset Management Co. Ltd acquired a 35% stake in LIC Mutual Fund Asset Management for Rs.3,080 crore, or 2.4% of the latter’s assets at the time. T Rowe Price Global Investment Services Ltd picked up a 26% stake in UTI Asset Management Co. Ltd for $142.4 million (Rs.740 crore today) in the same year, valuing UTI at about 3.25% of its assets.