Religare looks for buys, in talks with 3 mutual funds

The mutual fund industry is poised to enter a phase of consolidation through mergers & acquisitions. A steep fall in assets under management (AUM) from redemption pressures, lack of new issuances and sinking stock markets has rendered the operations of small- and medium-sized asset management companies (AMC) ineffective.

Industry sources say Religare Asset Management Company is on the look out for buying opportunities to expand its reach and network, and is in talks with fund houses like Taurus, Sahara and DBS Chola Mutual Fund. These fund houses have seen their AUM shrink by 49.42%, 37.69% and 74.25%, respectively, from the peak of January 2008.

Similarly, new entrants like UK?s Aviva and Japan?s Shinsei Bank are also said to be eyeing existing players since setting up a greenfield fund would require considerable time and expense. Recently, Aviva Asia chief executive Simon Machell mentioned that the insurance major?s plan of entering the asset management business in India was intact and that it did look at M&A as a possibility.

When contacted, Shachindra Nath, group chief operating officer of Religare Enterprises, told FE, ?Our mergers & acquisitions team is constantly looking out for potential opportunities. If any proposition would add value to our business, then we would definitely consider it. Our policy is to expand our business through both organic and inorganic way.?

However, senior executives of Taurus and DBS Chola mutual funds denied having any kind of discussions with Religare Mutual Fund.

The global economic slowdown and the consequent stock market meltdown have shrunken the AUM of 24 asset management companies amidst heavy redemption pressure. With the capital markets now showing signs of further weakness, the MF industry could see distress sale by some smaller AMCs. ?Already, collectively AMCs would have recorded losses in excess of Rs 4,000 crore in the first half of FY09, whereas they had earned profits of around Rs 18,000 crore in the second half of FY08,? said a senior executive with a fund house. ?Only a handful of fund houses like SBI, HDFC and UTI had recorded a profit in the first half, and the second half would be even worse,? he predicted.

Typically, asset management companies derive their source of revenues to run operations from the size of their assets under management or fund induction from the sponsors. Depending on the nature of funds floated, AMCs can charge up to 6% of the AUM as a management fee and manage their operations through these revenues. With the size of AUM more than halving for several small- and medium-sized funds, managing the operations is becoming increasingly difficult for them. Hence, mergers & acquisitions would be the logical conclusion for many funds, concur experts.

Valuation of AMCs is complex as it involves several parameters, like capital of the AMC, its profitability, size of the fund and AUM. And in times like these when several mutual funds are resorting to borrowing from banks to meet redemption pressures, profitability getting hit and returns also looking downwards, acquirers can bargain hard on the valuation. Distribution network and the fund management team are likely factors to score for targetted AMCs.

The mutual fund industry saw several mergers & acquisitions in recent years. In late 2008, Religare had acquired Lotus Asset Management Company after its AUM fell all by 31% in the market meltdown. In similar deals, Standard Chartered sold its Indian asset management business to Infrastructure Development Finance Co (IDFC) for $205 million. JM Financial Mutual Fund, the asset management arm of Nimesh Kampani-promoted JM Financial, had sold 12% stake to three hedge fund investors for $26.5 million in July 2008.

Similarly in December 2007, Reliance Capital sold about 5% of its fund unit for Rs 500 crore to Eton Park. In October 2007, Pioneer Investments picked up a 51% stake in Bank of Baroda?s Asset Mangement Company. In 2006, Canara Bank sold 49% stake in its asset management subsidiary Canbank Investment Management Services to the Netherlands-based Robeco Group NV.