Unifi Capital, a Chennai-based portfolio management company, has launched an India ‘Spin-off Fund’, which is expected to raise Rs 200 crore for niche investments into corporate spin-offs and demergers.
A study conducted by the company on spin-offs in the last five years has shown that spinning off a company unlocks value potential for companies, offering more benefits to the shareholders, said Maran, vice-president, Unifi Capital.
“In the last five years, India has seen about 75 spin-offs or demergers. We have conducted research on this and found a median outperformance of 16 per cent over and above the BSE500 Index, with an absolute return of 45 per cent during the average spin-off transaction period of 15 months,” he added.
At present, there are around 15 to 20 demergers in the process in the country and the company would invest in this for a period of 15 to 18 months by buying shares right after the demerger is announced and would make an exit after the process is completed. It is expected to generate risk-adjusted returns relative to market indices by investing in stocks of companies that are undergoing spin offs.
The fund would build a portfolio of 10 companies, where the exposure to any chosen sector will usually not exceed 30 per cent and would be closed at 10 transactions. While the tracking and monitoring of the investments are active, the activity at the account level will be passive, resulting in lower transaction costs and better post-tax return, he said.
The market valuation of a combined company would be lower than that of the distinct businesses listed as separate entities. The valuation gap, known as conglomerate discount, ranges from 15 to 50 per cent from company to company, depending on the quality of management and the transparency of segmental disclosures.
“The fund will look at derisking such discounts, since it removes discounts and improve shareholders return, said Maran. A spun-off subsidiary also has the advantage of an independent stock price which should reflect the capital market’s assessment of its management’s performance,” Maran added.
Unifi, established in 2001 and has offices in Chennai, Bangalore, Hyderabad, Mauritius and United Arab Emirates, is also planning to expand its operations to New Delhi with the launch of the Spin-off Fund. It would also look at setting up an office in Mumbai, he said. The company at present has 340 clients.
