India loses ten foreign AMC’s since 2010

With today’s announcement, Goldman Sachs has joined the growing brigade of foreign asset management companies (AMC's) which chose to completely exit their mutual fund businesses in India. Since 2010, a total of ten foreign AMC's including those of Shinsei, AIG, Fidelity, Daiwa, Morgan Stanley, ING Group, PineBridge, Deutsche Bank, KBC, and Goldman Sachs, have logged out of India.

Year	Foreign AMC
2010	Shinsei Asset Management
2010	AIG Global Asset Management
2012	Fidelity Fund Management
2013	Daiwa Asset Management India
2013	Morgan Stanley Investment Management
2014	ING Investment Management
2014	PineBridge Investments Asset Management
2015	Deutsche Asset Management
2015	KBC Asset Management (exits JV with Union Bank of India)
2015	Goldman Sachs Asset Management

Various articles seem to suggest that the stringent norms from SEBI (Securities and Exchange Board of India) in the form of higher net worth, investing of seed capital in open-ended schemes, quarterly disclosures on voting pattern in portfolio company resolutions, ban on entry loads, and rationalization of commissions to mutual fund distributors, have been the culprits. Nonetheless, the decision for the above rests with SEBI along with AMFI (Association of Mutual Funds in India), through which the mutual fund houses usually voice their opinion. After all, the exits of renowned foreign asset management companies' certainly do reflect poorly on the state of affairs in the Indian mutual fund business.

Focusing back to the deal between Goldman Sachs and Reliance Capital; as per the terms, Goldman Sachs Asset Management India would be receiving INR 243 crore in cash from Reliance Capital Asset Management for parting with its 100% stake in the business. The amount is approximately INR 100 crore more than what Goldman Sachs had paid to acquire the business from the original promoters of Benchmark Asset Management Company in 2011. Considering the cumulative losses of an equivalent amount reported by Goldman Sachs Asset Management India over the last four years, it seems the parent Goldman Sachs Group, Inc. was happy to exit at par.

Deutsche AMC India was probably valued at over 1,000 crores

With more than a decade of existence in the Indian mutual fund industry and INR 25,000 crore in assets under management (AUM), the Deutsche AMC India easily found a match in the form of DHFL Pramerica Asset Managers to take over its mutual fund business. Though no formal communication of this deal seems to be available anywhere, various media reports have indicated that an agreement was signed sometime early August 2015 for a purchase consideration of INR 400 crore.

Established in 2003, Deutsche AMC India has a reasonably strong track record and deep relationships with institutional clients and distribution partners. On the other hand, DHFL Pramerica, which initiated its mutual fund innings in India sometime 2008 with the real estate major DLF, has not been able to scale up in the manner it had wished to. At the end of September 2015, DHFL Pramerica had an AUM of just INR 2,366 crore or ~0.2% of the total industry AUM. DHFL (the new JV partner) had swapped places with DLF at Pramerica India’s mutual fund arm last year.

Given its chequered history in India, Pramerica couldn’t let go off this one golden opportunity to bag Deutsche AMC’s India business and muscle its AUM size by 10x. DHFL’s business links with Deutsche seems to have worked in favor of the deal.

Coming to the probable valuations, it would be prudent to compare Deutsche-DHFL Pramerica deal with likes of those where the AUM under consideration was above INR 5,000 crore and the acquisition was for a complete 100% stake. Two deals – Standard Chartered and IDFC; and Fidelity and L&T perfectly fit the bill:

• In 2008, Standard Chartered Mutual Fund was scooped up by IDFC for INR 820 crore, valuing the latter at 5.8% of its total AUM of INR 14,000 crore. Standard Chartered AMC had nearly 80% of its AUM in debt.
•  In 2012, Fidelity sold its Indian mutual fund business to L&T Finance for an estimated INR 550 crore, valuing the latter at 6.2% of its total AUM of INR 8,800 crore. Fidelity AMC had 30% of its AUM in debt.

Considering the above and the fact that a debt heavy portfolio generally fetches a lower valuation, Deutsche AMC India could’ve probably asked for a minimum INR 1,000 crore, approximately 4.5% value of its average AUM of INR 22,800 crore (normalized for four quarters).