Market conditions, lack of profitability and regulatory flip-flops major concerns for acquirers.
Even as Reliance Mutual Fund has inked the biggest deal in the Indian mutual fund segment with Japanese life insurance major Nippon, experts do not see many more deals in the asset management space soon.
Dhirendra Kumar, chief executive officer at Value Research, said, "I do not see much M&A activity this year. Though our industry has too many players, many may not find buyers like in the past, simply because they are running short of cash.” He argued that deals had taken place when there was a strategic change in the business model.
Industry experts feel there are several other factors as well. These include profitability, declining assets and regulatory challenges, which may act as stumbling blocks for mergers and acquisition (M&As). Consequently, despite the industry going through bad times, buyers may not find it lucrative to enter the business.
In 2010-11, only a handful of the 43 asset management companies were profitable. Reliance MF led with the highest profits of Rs 261 crore, followed by HDFC MF's Rs 242 crore.
The global environment is also changing fast. The financial sector, internationally, is going through major changes so as to avoid conflicts of interest. Many banks or big insurers, for one, are getting rid of ancillary businesses. For instance, American International Group has put many of its businesses on the block across the world.
In India, such a situation has not arisen still. Many banks still own AMCs, with some public sector banks like State Bank of India having their own AMC, plus stake in others like UTI MF. As a result, there is an ability to absorb losses and plough more funds into the business.
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But standalone MF houses are facing some serious challenges. Said Saurabh Nanavati, CEO of Religare MF, "Profitability is not great in India. When foreigners come and see the industry's model, they are shocked to see the declining assets and high churn. M&A can happen but it will be very slow.”
But new players or acquirers would have to wait longer. Their business models have taken a serious hit in the last few years initially because of the entry loan ban in 2009, and then as market conditions have been uncertain. Inflows, especially in the equity segment, have been irregular – in short periods, followed by long periods of lull or even outflows. Debt, where a large part of the assets reside, does not make much money for AMCs.
According to Arindam Ghosh, CEO, Mirae Asset, "In the current slowdown, stakeholders in this business are patient. In the Indian market, one cannot go wrong and people have conviction in India's story, given the regulator's encouraging support for a broad-based growth of the industry."
Some believe that given the number of players – 43 in all – the way forward is consolidation. "Small players are deep in losses, so the way forward is consolidation,” says Dhruva Chatterji, senior analyst, Morningstar India. However, he felt market conditions and clarity from the regulator on various aspects are required for some action in the industry.