Valuations of fund houses have taken a serious hit due to lack of clarity regarding future growth in assets
One of the many fallouts of the entry load ban has been the reduction in valuations of asset management companies (AMCs). Gone are the days where deals were struck at 6-8 per cent of assets. In fact, industry officials admit that there are several fund houses seeking buyers. But, the roadblock is getting the right valuation.
“Valuations of AMCs have come down due to stagnant market, outflows from equity schemes and lower profitability on account of increased distribution expenses,” said Pankaj Agarwal, analyst – non-banking financial companies (NBFCs) and brokerages at Execution Noble.
Deals struck after the entry load ban has not been too highly valued. In September 2009, L&T Finance bought DBS Cholamandalam AMC for a valuation of 1.60 per cent of its assets. DBS Chola was quite debt heavy with a debt-equity mix of 92:08 at that time.
In November 2009, T Rowe Price bought 26 per cent stake in UTI AMC at 3.30 per cent of its assets under management (AUM) which had a debt-equity mix of 72:28 at that time.
In comparison, Eton Park bought 5 per cent stake in Reliance AMC in December 2007 at a valuation of 12.90 per cent of its AUM which had a debt-equity mix of 56:44 at that time. Due to the near-term negative outlook for the mutual fund industry, Agarwal now values Reliance AMC at just 4 per cent of its AUM – a far cry from its peak valuations.
The only aberration was Daiwa Securities purchase of Shinsei at 11 per cent of AUM. But industry observers said that it was mainly because of acquiring a mutual fund licence to operate takes a year or more. The premium was paid to start operations immediately.
Industry sources said that with the growth in equity assets – the lucrative part of the business – falling sharply, buyers are bargaining harder.
Since August 1, when the Securities and Exchange Board of India (Sebi) scrapped entry load on mutual funds , equity schemes of mutual fund houses have witnessed outflows of Rs 8,638 crore till June 30, data available on the Association of Mutual Funds in India (Amfi) website showed. In addition, the future is also not even clear.
For a fund house, it is more lucrative to manage equities than debt. Deducting all other expenses, a fund house can earn 100 basis points for managing equity assets per year, while it can get 10-15 basis points for managing debt assets. This means, the less equity a fund house manages, the less valuation it gets.
Before the ban, fund houses used to charge about 2.25 per cent entry load on equity schemes and pass on the same as commission to distributors. “Distributors have little incentive to push mutual fund products. To compensate for this, AMCs are paying distributors from their own pockets and this has affected their profitability,” added Agarwal.
| SEBI INITIATIVES |
| JUNE 30, 2009 # Scraps entry load on mutual fund schemes effective from August 1, 2009 |
| AUGUST 17, 2009 # Same exit load for all classes of unit holders |
| SEPTEMBER 16, 2009 # Systems audit of mutual funds |
| NOVEMBER 13, 2009 # Mutual fund transactions through stock exchange platform |
| FEBRUARY 2, 2010 # Change in valuation methodology for debt and money market instruments |
| MARCH 15, 2010 # ASBA facility extended to mutual fund NFOs; reduction in NFO period to 15 days; no use of unit premium reserve for dividend distribution |
Rashesh Shah, chairman and chief executive officer of Edelweiss Capital. “Cost control has become important because fund houses cannot just spend money. Also, the breakeven time will get stretched.”
The debt-equity mix is one of the main criterion for valuing a fund house. Other factors like fund size, brand name and distribution channel also play an important role in arriving at a valuation.
According to industry officials, at least 4-5 mutual fund houses are looking for buyers. However, the deals are not materialising due to mismatch in expectations of buyers and sellers.
