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MUMBAI : Vanguard Group Inc., besides local asset managers Nippon Life India Asset Management Ltd and Axis Asset Management Co. Ltd, are contenders to acquire IDFC Ltd’s mutual fund business in a deal that could be worth 7,000-10,000 crore, three people directly aware of the discussions said.

“Vanguard is a top contender. About 15 entities, including foreign asset management companies, financial services firms, and private equity funds, have shown interest in buying IDFC Mutual Fund. But the bidding process is still on. Once the bids are opened, IDFC will examine and shortlist the buyer," one of the three people said.

Vanguard is one of the world’s top money managers, with $8.5 trillion in global assets as of December end. The group, founded by John Bogle, is a pioneer in low-cost investing through index funds.

Value perception
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Value perception

The proposed sale is in line with IDFC’s plan to merge with IDFC First Bank Ltd and focus on banking operations after shedding its non-core assets, including IDFC AMC.

On 30 December, IDFC First Bank said its board is considering a proposal to merge promoter entities—IDFC Ltd and IDFC Financial Holding Co. Ltd—with itself.

“Even though IDFC Mutual Fund’s debt portfolio is bigger than its equity assets, the exposure is entirely in AAA-rated papers, which is why inflows to its debt schemes steadily increased after the IL&FS crisis. In the equity portfolio, even though the mix of equity schemes is low in the overall portfolio, the 1-3 year returns from the equity schemes are about 100%. That’s why IDFC is expecting 7-10% of the assets under management as a fair valuation for the asset management company business," the person cited earlier said.

That translates into a deal valuation of 8,000-10,000 crore for IDFC Mutual Fund, the person added.

However, the actual valuation of IDFC AMC may turn out to be different from IDFC’s expectations and fetch a value of 7,000-10,000 crore, the second person said.

A spokesperson for Nippon India Mutual fund said the company does not respond to market speculation.

Emails sent to Axis Mutual Fund and a Vanguard group spokesperson in the US remained unanswered.

IDFC Ltd and IDFC Asset Management Co. declined to comment on the deal.

In the mutual fund space, valuation is decided based on the proportion of equity funds to debt schemes.

It also depends on the AMC’s profitability, network, distribution strength and parent’s financial ability.

Typically, an AMC with a higher proportion of equity schemes attracts better valuations since it earns higher asset management fees and commissions.

“While shortlisting the acquirer for IDFC AMC, the banker and the board of IDFC have to keep in mind that the value of none of the existing mutual fund schemes of IDFC AMC gets destructed due to duplication of scheme categories. If the acquirer has schemes similar to the MF schemes of IDFC, only one scheme can be alive after the merger. Duplication of schemes is not allowed as it may hurt the interest of unitholders," said the first person.

Excluding fund of funds, IDFC Mutual Fund’s average assets under management for the December quarter stood at 1.25 trillion (around 90,891 crore in debt-oriented schemes and 30,257 crore in equity schemes, while the rest are in exchange traded funds), according to the Association of Mutual Funds in India (Amfi).

Axis Mutual Fund’s average assets under management was 2.53 trillion (around 95,381 crore in debt schemes, 1.5 trillion in equity schemes), while Nippon India Mutual Fund’s average assets under management stood at 2.8 trillion ( 1.09 trillion in debt schemes and 1.15 trillion in equity schemes, while the rest are in exchange traded funds) for the December quarter, according to Amfi.

IDFC has hired Citigroup Global Markets as the investment banker to shortlist an acquirer for IDFC Mutual Fund, said the first person.

A Citigroup Global spokesperson declined to comment on the deal.

“Considering the way IDFC’s equity schemes have grown and the bullishness in equity markets, 3,500-4,000 crore should come from the sale of equity schemes, around 10% of the equity assets under management. Around 1 trillion of assets under management are in debt schemes of IDFC AMC, and 3-5% of these assets under management should be the ideal valuation of these debt schemes, which amounts to 3,000-5,000 crore. IDFC Mutual Fund has been recording a steady profit growth. For the half year, the net profit was at around 90 crore. So, the valuation has to command a premium compared to past deals," said the second person, who is close to the board of IDFC.

There have been a few deals in the mutual fund industry in the recent past.

In 2019, Nippon Life acquired 22.49% in Reliance Nippon Life Asset Management (now named Nippon India Mutual Fund), valuing the asset management company at 6.86% of its assets under management.

Nippon India Mutual Fund, whose market cap is 20,703 crore on Tuesday, is valued at 7.4% of its December quarter assets under management.

The market cap of HDFC AMC is at 47,567crore as of Tuesday, which translates to a valuation of 10.57% of its average assets under management worth 4.5 trillion for the December quarter.

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