Asset management is a lucrative business, isn’t it?

Investors may or may not earn high returns, but mutual fund houses enjoy hefty valuations.

The latest case in point is L&T Mutual Fund. It is believed to be on the block for Rs 2,000 crore, approximately 5% of its Assets Under Management (AUM).

L&T Mutual Fund had acquired Fidelity Mutual Fund’s India business in 2012, and before that, it had also picked up DBS Cholamandalam Mutual Fund back in 2009.

Do you know how much it had paid for these acquisitions?

As per the Economic Times dated March 28, 2012; it paid in the range of Rs 530 to Rs 550 crore to Fidelity to acquire the AUM of Rs 8,881—6.2% of AUM. And it had picked up DBS Cholamandalam at dirt-cheap valuations as revealed by Business Standard dated September 25, 2009. According to which, it paid only Rs 45 crore (after adjusting cash balance and current assets) to acquire Rs 2,890 crore—just 1.56% of AUM.

At the time of the Fidelity Mutual Fund’s acquisition, Mr Y.M. Deosthalee, Chairman & Managing director, L&T Finance Holdings had said that “Size is very important in this business. Over the next few years, we want to be among the top five players in the Indian mutual industry.”

However, this still remains an unfulfilled dream with the L&T Mutual Fund ranking 13th on the tally at present. As on March 31, 2017, AUM of L&T Mutual Fund was Rs 39,300 crores.

Nonetheless, L&T Finance Holdings is going to make a huge profit if the deal goes through and it manages to sell its mutual fund arm successfully for Rs 2,000 crore. However, some industry experts believe the deal value could be anywhere between Rs 1,200 to Rs 1,500 crore.

A few industry experts also believe, even at Rs 2,000 the fund house is unlikely to make much of profit, as it has paid out a much higher cost to acquire assets over the years. Numbers don’t justify their claims entirely, although their claims have some merit.

Here’s the real story…

Between March 2016 and March 2017, L&T Mutual Fund’s AUM grew at around 60% and debt schemes formed close to 70% of total AUM.

Prima facie, if L&T Finance Holdings earns Rs 2,000 crore in a deal, it wouldn’t be a bad deal for it. In fact, it could turn out to be a favorable deal, especially considering the acquisition costs that L&T Mutual Fund has paid to Fidelity Mutual Fund and DBS Cholamandalam Mutual vis-à-vis its ask price in a sales deal. That being said, it reported a loss of Rs 51.89 crore in FY 2015-16 and its accumulated losses stood at Rs 420.26 crore on March 31, 2016.

As some experts believe this clearly indicates that, if the deal is struck at say Rs 1,200 crore, it may actually not fetch much to L&T Finance Holdings, however, at Rs 2,000 crore it’s still a good deal.

Now as an investor, you may wonder why all this information should matter to you.

First and foremost, you must be concerned about such developments since your money is at stake. When there’s a change in the ownership and the asset management team, there will be a direct and an indirect impact on your investments.

Ideally, review your investment portfolio during such time and get rid of mutual fund schemes — which include that of L&T Mutual Fund and other fund houses — that have proven to be dud. While you’re evaluating make sure you’re backing your decision with thorough research in the interest of your long-term financial wellbeing.
 

1. The phase of consolidation, mergers and acquisition in the asset management industry is not over yet.
    
2. Asset Management Companies (AMCs) are struggling to recover and grow their businesses without incurring additional costs. In other words, asset management is still a push-business, where investors shy away from making buying decisions without any substantial influence.
    
3. The mutual fund houses have failed to keep pace with the changing business environment. Ever since the Securities and Exchange Board of India (SEBI) banned the entry load, mutual fund houses have been struggling to stay in the green and have been selling out. Nonetheless, the top mutual fund houses with a deep distribution reach and an extraordinarily broad base of AUM are getting stronger.
    

These findings primarily highlight that, instead of paying hefty costs in the acquisition, if companies invest the equivalent resources in educating investors and convincing them about the benefits of investing in mutual funds, mutual fund industry may again resume the growth path. However, fund houses haven’t managed to think beyond launching New Fund Offers (NFOs).

No place for shortcuts now—sooner they realise this, the better it will be for them as well as for investors.

PersonalFN has been working on various platforms and has been taking new initiatives towards educating investors.

Here’s a great opportunity for you from PersonalFN, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025. In this report PersonalFN will provide you with a readymade portfolio of its top recommended equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. So, we highly recommend you to opt for The Strategic Funds Portfolio For 2025
 

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