Mumbai: Reliance Capital Asset Management Ltd, the mutual fund arm of the Anil Ambani-controlled Reliance Group, may sell a 26% stake to Japan’s Nippon Life Insurance Co. Two Reliance Group officials said that the companies are in advanced talks and the transaction may be clinched at a valuation of up to Rs4,000 crore, which would be a record for a mutual fund stake sale.

“Nippon Life has vast experience in managing assets. They bring expertise and scale on board. On the other hand, Nippon gets direct access to the growing financial services market in India through one of the most profitable Indian fund houses. So it benefits both," said one of the two Reliance Group officials, both of whom declined to be named as final approvals are yet to be secured.

A Reliance Capital Ltd spokesperson declined to comment on email queries from Mint about the deal.

The possible stake sale would follow a recent partnership between the two entities in the life insurance sector.

Reliance Capital chairman Anil Ambani. Photo: AP

Reliance Capital is the parent company of Reliance Mutual Fund and Reliance Life Insurance.

Nippon Life has around $600 billion of investments around the world. As the country’s second largest fund house after HDFC Asset Management Co. Ltd, Reliance Capital Asset Management managed average assets worth Rs90,660.60 crore in July-September, according to the Association of Mutual Funds in India, or Amfi, a representative body of mutual funds.

The deal, if finalized at Rs4,000 crore for a 26% stake, will value Reliance Capital Asset Management at 16.9% of the present average assets under management (AUM) of the fund house, which would be the highest ever valuation for any stake acquisition in the Indian mutual fund industry.

India has 44 asset management companies (AMCs) with total average assets worth Rs7.13 trillion currently, according to Amfi.

There have been several acquisitions in the Indian mutual fund business, with valuations ranging from 1.6% to 13% of AUM.

In 2008, hedge fund manager Eton Park Capital Management purchased a 4.76% stake in Reliance Capital Asset Management for Rs501 crore, valuing the fund house at 13% of its AUM.

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 at the time.

In 2009, L&T Investment Management Ltd paid Rs450 crore to buy out DBS Cholamandalam Asset Management—1.6% of the value of the latter’s assets.

In the mutual fund segment, acquisitions are valued on the basis of the asset mix of a fund house, network strength, long-term earnings prospects and profitability. Typically, the higher the amount of equity AUM over the long term, the greater the valuation. This is because equity mutual fund schemes earn better commissions compared with debt and other fund categories in a given tenure.

Equity related and monthly instalment plans earn a commission of 80-90 basis points (bps) of the investment made, while debt schemes, such as fixed-maturity plans, earn 30-40 bps in commissions. Gold exchange traded funds, or ETFs, earn commission of 50-60 bps. One basis point is one-hundredth of a percentage point.

In terms of asset mix, at least 65% of Reliance Mutual Fund’s assets are in long-term debt, equity and gold in the form of ETFs and fund of funds.

A higher-than-industry average valuation for the stake sale can also be explained by the profitability of the fund house. Reliance Mutual Fund recorded the maximum profit in the industry in fiscal 2011. The fund house has beaten HDFC Mutual Fund in terms of profit, while losing its top ranking to the latter in terms of average AUM.

For the fiscal year 2011, Reliance Mutual Fund posted a 34% jump in profit to Rs261 crore from Rs195 crore in the year before. HDFC Mutual Fund, which managed average assets worth Rs91,827.11 crore, made a profit of Rs242 crore, according to Amfi.

While addressing its annual general meeting last fortnight, Anil Ambani had said that Reliance Capital will look at unlocking value across all its major businesses, without indicating the size of any stake sale in the mutual fund and its valuation.

On 1 September, Reliance Capital had announced it had entered into an understanding with Nippon Life to explore additional areas of partnership across all Reliance Capital businesses.

“We are exploring three areas of collaboration," Sam Ghosh, chief executive officer of Reliance Capital, had said. “Nippon Life can help distribute some of our asset management products in overseas markets where they are strong, like South-East Asia and Japan."