Three contenders in race for IDFC MF

“Vanguard is a top contender. Around 15 entities, including foreign asset management companies, financial services firms and private equity funds, have shown interest in buying IDFC Mutual Fund. But the bidding process is still on. Once the bids are opened, IDFC buyers Will investigate and shortlist him,” said one of the three people.

Vanguard is one of the world’s top wealth managers, with $8.5 trillion in global assets as of the end of December. The group, founded by John Bogle, is a leader in low-cost investing through index funds.

The proposed sale is in line with IDFC’s plan to merge with IDFC First Bank Ltd. and focus on banking operations after delisting its non-core assets, including IDFC AMC.

On December 30, IDFC First Bank said its board is considering a proposal to amalgamate the promoter entities – IDFC Ltd and IDFC Financial Holding Company Ltd – with itself.

“Even though the debt portfolio of IDFC Mutual Fund is larger than its equity assets, the exposure is entirely in AAA-rated papers, which is why its debt schemes have seen a steady rise after the IL&FS crisis. In equity portfolios, even though the mix of equity schemes in the overall portfolio is less, the returns of 1-3 years from equity schemes are almost 100%. This is why IDFC is expecting 7-10% of the assets under management as a fair valuation for the business of the asset management company,” the person said earlier.

This translates into the valuation of the deal 8,000-10,000 crore for IDFC Mutual Fund, the person added.

However, the actual valuation of IDFC AMC may differ from the expectations of IDFC and may derive its value from 7,000-10,000 crore, said another person.

A spokesperson for Nippon India Mutual Fund said the company does not react to market speculation.

Emails sent to Axis Mutual Fund and a spokesperson for the Vanguard Group in the US remained unanswered.

IDFC Limited and IDFC Asset Management Company declined to comment on the deal.

In the mutual fund space, valuations are decided based on the ratio of equity funds to debt schemes.

It also depends on the profitability, network, distribution strength of the AMC and the financial capability of the parent.

Generally, AMCs with higher ratio of equity schemes attract better valuations as it earns higher asset management fees and commissions.

“While shortlisting the acquirer for IDFC AMC, the banker and the Board of IDFC shall keep in mind that the value of any of the existing Mutual Fund schemes of IDFC AMC is not lost on account of duplication of scheme categories. If the acquirer has schemes similar to the MF schemes of IDFC, then only one scheme can survive after the merger. Duplication of schemes is not allowed as it may hurt the interests of the unitholders,” the first person said.

Excluding Fund of Funds, IDFC Mutual Fund had average assets under management for the December quarter 1.25 trillion (approx.) 90,891 crore in debt oriented schemes and 30,257 crore in equity schemes, while the rest is in exchange traded funds, according to the Association of Mutual Funds in India (Amfi).

The average assets under management of Axis Mutual Fund was 2.53 trillion (approx.) 95,381 crore in loan schemes, 1.5 trillion in equity schemes), while Nippon India Mutual Fund had average assets under management 2.8 trillion ( 1.09 trillion in loan schemes and 1.15 trillion in equity schemes, while the rest is in exchange traded funds) for the December quarter, according to Amphi.

IDFC has appointed Citigroup Global Markets as investment banker for shortlisting an acquirer for IDFC Mutual Fund, said the first person.

A Citigroup Global spokesperson declined to comment on the deal.

“Given the manner in which the equity schemes of IDFC have grown and the rally in equity markets, 3,500-4,000 crore should come from sale of equity schemes, about 10% of the equity assets under management. Everywhere 1 trillion assets under management are in the loan schemes of IDFC AMC, and 3-5% of these assets under management should be the ideal valuation of these loan plans, which is 3,000-5,000 crore. IDFC Mutual Fund is reporting consistent profit growth. For half the year, the net profit was approximately 90 crores. Hence, valuations have to command a premium as compared to previous deals,” said another person, who is close to IDFC’s board.

There have been a few deals in the mutual fund industry in the recent past.

In 2019, Nippon Life acquired 22.49% in Reliance Nippon Life Asset Management (now renamed Nippon India Mutual Fund), valuing the asset management company under management at 6.86%.

Nippon India Mutual Fund, whose market cap is 20,703 crore as on Tuesday, valuing 7.4% of its December quarter assets under management.

The market cap of HDFC AMC is 47,567 crore as of Tuesday, which translates to a valuation of 10.57% of its average asset under management value 4.5 trillion for the December quarter.