The recent sale of IDFC Mutual Fund presents learning for the sceptics, that "all that glitters might not be glass", sometimes it is real gold. Even though the acquisition of IDFC Mutual Fund that has fetched the lowest valuation in terms of asset under management (AUM) among the recent buy-outs in the industry, in absolute terms the deal was quite profitable for IDFC.
The acquisition, on further investigation and analysis, reveals that it is a win-win for both IDFC and the buyer, a consortium of Bandhan Financial Holdings, GIC, and ChrysCapital. The buyers are eager enough to penetrate the expanding capital market of India even while being aware of the potential risks of IDFC's portfolio revealing another nugget of market wisdom -- valuation of an acquisition ceases to be merely a number game when the timing is right.
The IDFC Mutual Fund sale is the latest amongst the recent acquisitions that the Indian mutual fund industry has witnessed.
A decade ago Indian conglomerates were buying Indian operations of international fund houses. A 180-degree turn in this trend has emerged recently where the international fund houses are excited to get a piece of the growth-story of the Indian capital market. This is the phase of opportunity for Indian conglomerates to put their asset management companies on the block for sales.
Two big domestic mutual funds got sold within 100 days. IDFC Mutual Fund, the fund house, ranked 9th, in terms of Asset Under Management (AUM) got acquired by a consortium of Bandhan Financial Holdings, GIC and ChrysCapital. The consortium paid ₹4,500 crore for IDFC that managed AUM of ₹1.21 lakh crore, translating the deal value to 3.7% of the AUM.
Previously, by the end of December 2021, HSBC Asset Management, a much smaller Fund house with AUM of just ₹11,475 crore acquired L&T Mutual Fund, ranked 12th, with AUM of ₹78,000 crore. HSBC Mutual Fund paid roughly ₹3,200 crore ($425 million) translating into approx. 4% of L&T's AUM. In 2012, L&T had acquired Fidelity by paying over 6% of the international asset manager's AUM.
Last year, Singapore-based Manulife invested ₹265 crore for 49% stake in Mahindra Mutual Fund, translating into approx. 10% of the AUM. In December 2013, HDFC Mutual Fund acquired Morgan Stanley Management at 5.2% of AUM.
Why IDFC Mutual Fund's sale fetched low valuation
In March 2008, IDFC, an infrastructure funding giant won a bid to acquire Standard Chartered Mutual fund that had an asset under management of ₹14,180 crore. IDFC paid $205 million (approx ₹820 crore), that translated into 5.8% of the AUM.
Now, with a much bigger distribution network, retail folios, and assets, IDFC fetched a deal value of mere 3.7% of the AUM, a relatively lower value compared to what it paid to enter into the asset management business, fifteen years ago.
Industry sources tell Fortune India that IDFC is primarily an AMC where AUM composition is tilted towards low-valuation fetching debt funds. At the end of March 2022, debt fund AUM was ₹77,036 crore (approx. 64% of AUM) while equity scheme had ₹31,348 crore (approx. 26%) and liquid fund ₹12,648 crore (10%).
The fund house currently runs 49 schemes in which 26 are debt schemes. Moreover, in these 26 debt schemes, 9 schemes are close ended Fixed Maturity plans (FMP) and all of them are maturing in the next 2 to 3 years.
"Assigning valuation to a portfolio which will be redeemed in next two years is very tricky, and it may spell trouble for new owners of the fund if future FMP launches get tepid response," says the CEO of a rival fund house. He adds that debt funds mostly fetch lower valuation as margins are very thin in debt schemes.
Another industry based source points out that none of the IDFC equity schemes sport a respectable AUM of $1 billion or above. Investors ascribe higher valuation to a fund house that runs large equity schemes as profit margins in such schemes are good, he says.
Speaking with Fortune India, Vishal Kapoor, CEO, IDFC Mutual Fund, says his company made a profit of ₹144 crore in last fiscal. "All our schemes are doing fine," he adds.