that with the pressure on spreads bound to get worse, it's necessary to have a strong fee-based business. Why are you getting into the retail asset management space?
It's the third piece of the assets under management (AUM ) strategy together with private equity and structured equity. Every one of the AMCs today has an infrastructure scheme in the listed space because infrastructure has become a significant part of the overall investible universe in the market. We found we couldn't play that market and given our reputation and brand positioning in this space, we wanted to be here. If you build, it will take you 24 months to get there, because competition is very high. So we bid for Standard Chartered's fund and now our suite will look different. The fees from AMCs can vary from 25-35 basis points to 1 per cent of the assets under management.
At 5.8 per cent of the AUM (you paid around Rs 800 crore for a book worth around Rs 14,000 crore), do you think you overpaid for the Standard Chartered fund?
Time will tell. If I were a private equity investor I wouldn't have paid this price. But, as a strategic investor my calculation of the price is different, there is an acquisition premium built in. Our bet is that the team that comes with the acquisition combined with the IDFC brand name will allow us to expand assets aggressively to the point where we will make a decent return. In a strategic sense, it fills a gap in our offering.
IDFC is primarily a wholesale player, where does a retail business fit in?
I disagree with that. You may want to make unnecessary and meaningless distinctions between wholesale and retail but our analysis is that we are product manufacturers. It's not that we have developed a retail distribution network. We will, for the time being, unless strategic reasons compel us to think otherwise, distribute our asset management product through a variety of open architecture distribution platforms. We're not looking to build a retail distribution business but that might change. If we feel that we have an opportunity to build a platform that has synergies with the rest of what we're doing, we'll build it.
In India, mutual funds is a distribution game, not a product game.
That is a balance that will eventually be restored in our country. We shouldn't lose sight of what the balance is in the rest of the world, we are in the very early stages. There's a lot of hype around retail customers, it's like you own so many eyeballs, so you get so much value. It's not that simple. I think developing a retail distribution platform is an expensive proposition, I'm not sure we want to do that. Whether we want to build niche distribution to distribute our products, is something we will evaluate very carefully.
My own assessment is that there is a lot of potential in developing a bouquet of products that can be distributed through some kind of a truncated, a more modest and very focussed platform which, at the end of the day, is more wholesale in flavour. So, if we're looking at platform that for distribution purposes relies more on institutional buyers as well as high net worth individuals, which includes corporate, then that would be very different from one that you would be building for a retail brokerage business.
What is IDFC's business model?
The spreads on our lending business are continuously under pressure because of the competition. But we need to deliver stability and visibility to both the revenue and earnings streams. If we are simply an equity investor then the returns are lumpy. So we're trying to strike a balance between those businesses that require more capital and which impact the return on equity and those that require less. We've decided to focus on investment banking and asset management; the former is more volatile but asset management is more stable. So, it's strategically important for us to grow the asset management business to generate a revenue stream that consumes less capital, allows us to provide a valuable product and generates returns that are predictable.
So you plan to manage money across various asset classes?
We have two P/E funds with a total corpus of $650 million, which invest in companies that provide infrastructure services. That requires us to deliver higher returns which is why you get a 2 per cent fee and a 20 per cent share of the profits. We're focussing very hard on this and we need to find talented management teams in whom we invest. That will generate value for us over time, most likely when those companies go public. In fact, we're raising a third P/E fund.
How does the structured equity fund work?
The value proposition for the structured equity fund, which we're doing with Citigroup and which again is third-party capital, is lower-risk but also lower-return. We invest in projects: for instance, we could pick up a 20 per cent stake in a road concession for 25-30 years. A portfolio of such projects will be created which will generate predictable cash flows. How this fund delivers a return is by aggregating a set of relatively stable cash flows into one vehicle that is taken public. So, the stretch of road doesn't go public. If P/E funds need to deliver returns on equity of say 25 per cent or thereabouts, these funds will be expected to give say 700-800 basis points less.
How profitable will you be as a company?
Today, the ratio of interest to fee income is 50:50. But, the ratio will depend on our lending spreads. We should deliver a blended return on equity of about 20 per cent to shareholders, otherwise why should anyone want to invest in IDFC?
