Allowing private equity players to become sponsors of mutual funds may help democratise the industry further and bring in more players, spurring innovation and growth.
On Friday, Sebi floated a consultation paper on review of regulatory framework for sponsors of mutual funds. The working group that has drafted the paper noted that PEs with significant capital can invest in technology, bring in strategic guidance and good talent to fuel growth and innovation and expand the presence of MFs in the country.
“The more the competition among fund companies, the better it is from an investor’s perspective. There is no reason why banks, NBFCs and broking firms should dominate the mutual fund landscape. Bringing in players from different backgrounds will make the industry more heterogenous”, said Vicky Mehta, an independent analyst who tracks mutual funds.
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The country currently has 44 players with a dozen more waiting to get the regulatory nod to set up the business. Experts believe that there is room for more players. In the US, for instance, the asset management space is littered with smaller, boutique asset managers with sponsors that include former star managers, broking firms and individuals who are into financial planning.
ChrysCapital, a PE firm, last year acquired a 20% stake in IDFC AMC.
PE typically invest in companies with an 8-10 year horizon and exit through secondary sales and initial public offerings. This may not be that easy for sponsors of mutual funds.
“PE players that enter the asset management industry will have to be willing to stay put and dig in for a long haul. Growing assets meaningfully takes several years. Margins have come under pressure in the past few years due to regulatory diktats such as the cap on the total expense ratio. To become profitable, one will have to achieve scale,” said Mehta.
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The Sebi working group has suggested some safeguards for allowing PE players. These players should fulfil the alternate eligibility route and meet all the requirements prescribed therein to qualify as a sponsor of a mutual fund. A lock-in of five years will be applicable to both the investments by the PE in corporate entity/SPV as well as in AMC.
PE or its manager should have a minimum of five years of experience in the capacity of fund/investment manager and the experience of investing in the financial sector. No off-market transactions should be permitted between the schemes of MF and sponsor PE. The MF sponsored by the PE should not participate as an anchor investor in the public issue of an investee company, where any of the schemes/funds managed by the sponsor PE have an investment of 10% or more or has a board representation.
“Historically, the attraction of asset management businesses has rested on high profit margins, fast growth, and low capital intensity. However, with regulations (structural) and high commission payouts (hopefully cyclical) pressuring margins, the medium- to long-term investment outlook for the industry is now a lot more AUM growth-dependent than in the past,” said a recent note by Kotak Institutional Equities.
The key longer-term imperatives for AMCs are creating incentive structures and culture that promote long-term alpha creation; investing in passives to create scale advantages and as a strong hedge for business model risks; investing in alternatives to mitigate MF yield pressures, and protecting reputation across cycles, according to the brokerage.