IDFC eyes foreign partner for AMC

MUMBAI: Infrastructure Development Finance Company, or IDFC, is set to divest 26% in its asset management business to a foreign partner to tap global institutional investors and to establish its presence in overseas markets over the next few years.

The infrastructure financing company has been looking to diversify its fee-based revenue streams as part of a broad strategy it has been pursuing over the past five years. The entry into the asset management business in 2008 was in consonance with this strategy and the latest move to induct a foreign partner is aimed at scaling up the asset management business further, said company officials.

A senior IDFC official confirmed that the infrastructure financing company was in talks to bring on board a partner for its asset management company. “We are in negotiations with a foreign partner to sell a strategic stake,” said the official on condition of anonymity. He, however, declined to discuss further details of the proposed plan or the valuations, although executives at a couple of other mutual funds said that the name of a French investor is now doing the rounds.

Since many local asset management companies don’t have tie-ups with global partners or overseas reach, a joint venture with a foreign partner helps them tap overseas funds. Dhirendra Kumar of Value Research, which tracks mutual funds, said that the offshore fund management business could be as large as the scale of assets managed by local fund houses.

JP Morgan and HSBC, which have asset management units here, jointly manage close to `20,000 crore from offshore funds alone, he said in a reflection of the investible funds on tap. The revenues earned from this are significant,
according to him.

In January this year, US-based investment management firm T Rowe Price acquired a 26% strategic stake in the most profitable local fund house, UTI Asset Management Company, for `650 crore. The deal valued the country’s oldest mutual fund house at `2,500 crore, or about 3.6% of its assets under management.

IDFC started its mutual fund operations by buying out Standard Chartered’s asset management business in India for `820 crore in March 2008. This amounted to 5.67% of the total assets under management of `14,141 crore of StanChart AMC as of February 2008.

In the past two years, IDFC Mutual Fund has managed to increase its assets under management to about `20,000 crore, making it the 10th largest asset management company. IDFC Mutual Fund’s portfolio is heavily skewed towards debt rather than equity. Its equity portfolio is close to `5,500 crore.

Although valuations were very high in early 2008, IDFC went ahead with the StanChart Mutual Fund deal in keeping with its strategy of diversifying its fee-based revenue streams.

Some years ago, mutual fund valuations were very high. In 2007, hedge fund Eton Park Capital Management had valued Reliance Capital Asset Management at 13% of its assets for a 5% equity stake. However, valuations have plunged after the market went through a correction phase in 2008. About 41 mutual funds had aggregate assets under management of `6.87-lakh crore in August 2010, according to the Association of Mutual Funds in India (Amfi). More than two-thirds of the assets are in income funds, mostly from companies, and just a quarter of them in equity, reflecting a modest retail participation.

Although many of these fund houses are bleeding, they still prefer to battle it out considering the growth prospects in India.

In June, Nomura, the Japanese financial major, bought a 35% stake in LIC Mutual Fund for a little over `300 crore, valuing the fund house at slightly less than 3% of its total assets under management.

Later, engineering firm Larsen & Toubro (L&T) entered the asset management business by acquiring Cholamandalam DBS Finance AMC for `45 crore, valuing the Chennai-based firm at about 1.6% of its assets under management.

About 22 asset management companies, including Schroder Investment Management (Singapore), Union Bank of India-KBC Asset Management, Global Investment House and Enam Asset Management, are seeking regulatory approval to start the mutual fund business.