Edelweiss 'looks to do an HDFC--scale up and list': Group chief Shah

This financial year will be a washout; businesses are keeping an eye on what happens post March 2021: Rashesh Shah, chairman and CEO of Edelweiss group.

Edelweiss group has roped in private equity player PAG to invest Rs 2,200 crore in its wealth management business for a 51 per cent stake. The domestic financial services conglomerate earlier inducted foreign partners in its life insurance and non-banking financial services (NBFC) businesses. Rashesh Shah, chairman and CEO of Edelweiss group, tells Samie Modak that he wants to do an HDFC—scale up and list individual business. Edited excerpts:

How’s the Edelweiss group structured now and what is the plan?

We have got six businesses—wholesale credit, retail credit, asset management includes asset reconstruction (ARC), wealth management, life insurance and general insurance. So far, we operated as an integrated group. We now we want all the business to scale up and eventually get listed either through a demerger or an initial public offering (IPO). Similar to what HDFC has done with HDFC Bank, HDFC Life and HDFC Mutual Fund. Since we are not a big business house, we want partners to also provide capital and long-term support to our businesses. In life insurance, we have got Tokio Marine; in ARC we have CDPQ and now PAG for wealth management, which will be the first to be hived off. Even by regulations all businesses need to be independent and having a partner provides an added layer of governance.

What has given the growth drivers for the private wealth management industry?

One is the growth in domestic household savings. Now they are about $8 trillion of which $3 trillion is in financial savings. Most of savings are in physical assets. Financial assets, which were only about $1 trillion a decade ago, has become $3 trillion. So household financial assets are growing fast. Earlier, people preferred bank deposits. Over the last few years, people have been looking for alternatives. Also, wealth is getting more democratised. A lot of the salaried class have wealth, stock options and good salaries. So now there are various classes and not just families and ultra-high networth individuals. So the universe of people having a few crores to invest has grown. Also, the growth of this industry is directly co-related to the growth household financial savings. If you look at the non-bank financial savings, which invests in mutual funds, bonds and alternatives, has been growing at 14-15 per cent annually over the last decade.

What is the ticket size for the wealth business?

We have various segments. Smallest client is between Rs 50 lakh and Rs 1 crore. Our biggest are between Rs 1,000 crore and Rs 2,000 crore, which are typically large family offices. If you provide good advice, research and are ability to execute a transaction, the opportunity is huge. It is not easy to build this business. We have taken two decades years to build it. Started with acquisition of Rooshnil Securities in 2000 for Rs 8 crore. Today, the wealth management business is valued at Rs 4,500 crore. Capital does play a role but you need to spend time in building the customer base. This business is purely advisory but also involves transactions, brokerage and distribution. We are the second-largest non-banking wealth manager in India with over Rs 1.25 trillion assets. The capital market business involves broking and investment banking. With the new partner, we can aim for listing, consolidate our leadership position and continue on the growth path.

PAG will be the controlling shareholder. What changes?

They will help grow the business . They are a private equity company and not wealth managers.  We bring the management and India understanding. We have been in this business for a long time. So it is a good partnership.

What are the spread you make in this business?

Usually it varies from products and clients. Some pay advisory fees, while some pay brokerage. But as a rule of thumb, your fee income is about 80-90 basis points of your AUM. So we make about Rs 1000 crore of fee income a year in this business. Scaling up of this business is very hard. You need to get the combination of people, capital and technology right along with scale. You can easily have 40 relationship managers but when you have 1,000 the consistency of service, the back end and technology and client experience all become very important.

When do you expect the economy to get back to normal?

Our assumption is Covid-19 will not go way but the worst is over. People now are learning to live with it. So we are seeing clear improvement in business resumption activity. Liquidity has improved. It will be slow come back to normalcy by March 2021. But the worst is behind us.

How’s the situation for the credit business?

Liquidity has improved, which was pain point earlier. For banks and NBFCs, the credit cost will go up and will hurt earnings. But mobilisation won’t be a problem to maintain capital adequacy. So it may lead to some amount of impairment but not in a way that will lead to crisis. This financial year will be washout year. But everyone is keeping an eye on what happens post March 2021. Everyone is taking steps so that when growth returns you can grab it with both hands.

You didn’t want to wait for normalcy to return to sell the wealth business?

Our idea is to do whatever is right for the business and not grapple with valuations. In a life of a business, you will raise money in good and bad times. You will only know in hindsight. But trying to time the market or try to optimize is not our philosophy. Our approach has been to create value through business growth not by timing the market. If you had asked me three months ago how things will be now, we had no idea. But on a long-term basis, we have a clear view of opportunities.