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Mutual Funds - L&T Finance buys Fidelity's mutual fund business in India

28 Mar 2012

L&T Finance has agreed to buy Fidelity Worldwide Investment’s Indian mutual fund business, becoming the 10th-biggest equity fund house in a highly fragmented and competitive market marked by wafer-thin profitability. The financial services arm of construction major Larsen & Toubro pipped rivals, including HDFC Asset Management and Pramerica, to purchase FIL.
The deal will immediately boost L&T’s assets to Rs 13,500 crore, making it the 13thbiggest fund and the 10th-largest on the basis of equity. "A large part of the L&T Finance business is lending. This is part of the move to increase fee-based income which is a steady business over mid-to-long term," YM Deosthalee, chairman & managing director of L&T Finance Holdings, told a press conference. Shares of L&T Finance rose 4.6% to close at Rs 49.80 on Tuesday after a late spurt. "It will be a turning point for L&T Mutual Fund and sad for the mutual fund industry, because a good fund house has decided to walk out of the country," said Dhirendra Kumar, managing director of fund tracker Value Research. Experts say the deal will confer size on L&T.

"This acquisition will catapult L&T Mutual Fund into the big league of Indian asset managers. With an excellent blend of equity and debt assets, combined with a great brand in L&T and a complementary distribution network, this provides a great platform for L&T Mutual Fund to potentially attain market leadership," said K Balakrishnan, chairman & managing director, Lazard India. But L&T’s task of growing the business has been made difficult by global investor unhappiness over the weak performance of the Indian economy and the government’s stumbling and erratic response. The Budget has been widely panned and foreign investors have turned off the spigot after pouring over 45,000 crore into the markets during January-February 2012. FII purchases so far in March have been a measly $960 million.

The financial details of the transaction were not disclosed, but Deosthalee said the valuation is in line with that of recent deals in the mutual fund industry. Industry sources said L&T has paid about Rs 530-550 crore to buy Fidelity, valuing the deal at 6.2% of Fidelity’s total assets under management of Rs 8,881 crore as on December 31. L&T, which entered the mutual fund industry in September 2009 by buying DBS Cholamandalam Asset Management, had assets worth Rs 4,616 crore as on December 31. Mutual fund industry sources said other bidders had offered to buy Fidelity at higher valuations than L&T, as much as Rs 600 crore, but these funds were not willing to absorb FIL’s staff, which includes its sales and marketing officials.

However, the deal does not include the equity fund management team led by Alexander Treves, the chief investment officer of Fidelity Mutual Fund. "The equity fund management team will be with us till the integration process is complete," said Deosthalee. He said Fidelity’s India Chief Executive Officer Ashu Suyash will be a key part of the integration process. As per the agreement, L&T will absorb most of the employees of Fidelity Mutual Fund. "Fidelity employees need not worry about this deal. L&T Finance is an equally strong brand. And historically, Indian funds have done much better than foreign fund houses," Deosthalee pointed out. The deal comes at an opportune time for Fidelity, which is facing a regulatory deadline to shift its trading desk to India by September. The mutual fund industry has lurched from crisis to crisis since the global financial meltdown of 2008. The ban on entry load, the upfront fee that mutual funds charged investors to pay distributors, in August 2009 has compounded their woes as distributors now have lesser incentive to sell schemes. The key challenge for L&T will be to retain investors in Fidelity funds, many of whom had invested in the ’Fidelity’ brand. The deal will not make any sense to L&T if it fails to retain these investors, industry sources said.
This is more so because apart from assets under management, which can be fickle most of the time, L&T Mutual Fund has not been able to buy out the experienced equity fund management team of Fidelity. But L&T could take heart from the performance of Templeton and HDFC asset management houses after their takeover of Zurich and Kothari Pioneer in the early years of the past decade. The buyouts happened just before the equity boom of 2004-08, helping both fund houses build a sizeable advantage over rivals. "We’ll be able to retain investors... We’re an equally good brand. We have good fund management capabilities to satisfy investors.

The integration will also happen at the distributor level," Deosthalee said. Tough business conditions have prompted several fund houses to strike similar deals. Japan’s Nippon Life Insurance bought 26% stake in Anil Ambani-controlled Reliance Capital Asset Management, India’s second-largest mutual fund by assets, for roughly Rs 1,450 crore. The deal valued Reliance Mutual Fund at 6.8% of its total assets under management of Rs 82,305 crore on December 31. In December 2010, Paris-based Natixis Global Asset Management bought 25% stake in IDFC Mutual Fund valuing it at 5.5% of total assets.

IDFC had bought Standard Chartered Bank’s asset management business for close to 5.7% of its assets in 2009. Earlier in 2010, US-based investment management firm T Rowe Price acquired a 26% strategic stake in UTI Asset Management Company, one of India’s most profitable mutual funds with a large equity asset base, for about 3.6% of its assets under management. In June 2010, Japan’s Nomura bought a stake in LIC Mutual Fund for about 2.5% of the fund’s assets. In 2009, IDFC bought Standard Chartered Bank’s asset management business for close to 5.7% of its assets.