Mumbai: Goldman Sachs Asset Management (India) Pvt. Ltd, a new entrant in the Rs6.75 trillion Indian mutual fund industry, is in advanced talks to acquire Benchmark Asset Management Co. Pvt. Ltd, which manages assets worth about Rs3,000 crore.
A person with direct knowledge of the development said the deal may be clinched at a valuation of 4-4.5% (Rs120-135 crore) of the assets under management of the 10-year-old asset management company (AMC) that is mainly focused on passive index investing.
There have been several acquisitions in the Indian mutual fund business, with valuations ranging from 1.6% to 13% of the assets under management. If the Goldman deal goes through, it will be the first instance of an index fund-heavy AMC being bought out by any fund house in India.
Goldman Sachs Mutual Fund entered the Indian asset management space in 2010.
There are 44 AMCs in the industry that has been grappling with sluggish sales and vanishing folios since a ban on entry load by the Securities and Exchange Board of India in August 2009.
Goldman Sachs’ move to grow through an acquisition is an anticipated consolidation in the mutual fund industry following the entry load ban that has hurt the profits of AMCs.
Goldman Sachs India head Brooks Entwistle declined to comment for this story.
A Benchmark official, too, did not offer any formal comment since the deal has not yet been closed.
Benchmark entered the industry in December 2001 with its maiden Nifty Benchmark Exchange Traded Scheme that currently has assets worth Rs510.87 crore. In February 2007, Benchmark launched the country’s first gold exchange-traded funds (gold ETFs). ETFs typically track underlying indices and are traded on exchanges like stocks. Gold ETFs allow investors to hold paper instead of physical gold.
Till date, a majority of the schemes managed by Benchmark AMC are index-traded.
The Gold Benchmark Exchange Traded Scheme has assets worth Rs1,506.29 crore, the highest among gold ETFs in India.
Following Benchmark, 10 other fund houses launched gold ETFs. The assets under such schemes are estimated at Rs3,255.41 crore at the end of December 2010, according to Value Research, a Delhi-based mutual fund tracker.
Goldman’s move to acquire a fund house that predominantly manages gold ETFs may be inspired by the potential of gold fund industry in India.
Indians’ fancy for the yellow metal is yet to be capitalized fully by fund managers.
Recently, Reliance Capital Asset Management Ltd, the largest AMC in terms of assets under management, launched a fund-of-fund linked to Reliance Gold ETF, betting big on the prospects of gold ETFs in India.
According to a recent media presentation by Reliance AMC, India holds at least $800 billion (Rs36 trillion) worth of gold, 11% of the world’s gold assets. Indians invest Rs1.43 trillion in gold every year, but a minuscule portion of this is routed through gold ETFs.
ETFs do not earn as much commission as equity schemes for fund managers, and Goldman’s negotiation to pay a value of 4-4.5% of assets of Benchmark to acquire the latter’s assets might be a tad too high, fund managers said.
Typically, prices paid for such acquisitions are directly proportional to the assets under equity schemes.
Benchmark AMC has also tested the waters of quantitive asset management, with three equity schemes that are not exchange-traded—Benchmark Derivative Fund, Benchmark Equity and Derivatives Opportunities Fund, and Benchmark S&P CNX 500 Fund. Collectively, they manage less than Rs200 crore of assets.
“Revenue in the ETF business is only 25-30% of what is earned from sales of equity schemes. Also, the income in ETF business fluctuates with the movement of assets under management. The valuation of 4% or more on assets of Benchmark AMC might be high,” said the chief executive of a rival fund house, on condition of anonymity.
Another concern, according to him, is that Goldman Sachs has always been into active asset management, and if it wants to manage ETF assets, it may need to retain the Benchmark team.
Earlier, in 2008, hedge fund Eton Park acquired a 5% stake in Reliance Mutual Fund for Rs5,000 crore at a valuation of 12.9% of the latter’s assets under management then. In 2009, Japanese money manager Nomura Asset Management Co. Ltd picked up a 35% stake in LIC Mutual Fund Asset Management Co. Ltd for Rs3,080 crore, or 2.4% of the valuation of the latter’s assets then. In 2009, L&T Investment Management Ltd paid Rs450 crore to buy out DBS Cholamandalam Asset Management Ltd, 1.6% of the value of the latter’s assets.
Though there aren’t too many instances of acquisition of ETF managers globally, in 2009, US-based BlackRock Inc. paid $13.5 billion to buy Barclays Plc’s investment unit. Following the acquisition, BlackRock became the world’s largest money manager.
According to a June 2009 Bloomberg report, Barclays Global Investors’ (BGI) assets included $829 billion in stocks, $427 billion in bonds and $159 billion in cash as of 31 December 2008.
“More than 70% was tied to indexes, including iShares exchange-traded funds. The firm has more than 2,800 funds that track about 250 indexes worldwide,” the report said.
This means that BlackRock had paid about 1% of the value of total assets under BGI for the acquisition.