Big-bang sale of IDFC MF narrows down to 4-way race; winner likely by March-end

The ongoing high-profile divestment process for IDFC MF, the mutual fund business of  IDFC Ltd and IDFC Financial Holding Company, has whittled down to a shortlist of four strategic suitors who may go solo or tie up with private equity firms going ahead, multiple sources in the know told Moneycontrol. This is expected to be the biggest mutual fund transaction in recent times and follows the recent sale of L&T MF to HSBC MF in December for around Rs 3,188 crore.

“Four strategic players, namely Bandhan Group, Indus Ind Bank along with the promoter group, Sundaram MF and Invesco MF have been shortlisted for the next stage. Binding bids are expected by March 15 post due–diligence. The target as of now is to seal the deal and pick a winner by March-end,” said one of the persons cited above.

Two other persons confirmed the same.

Blackstone which had also participated in the bidding process by bidding via wealth management company ASK Group is out of the race, the first person added. The global private equity giant had earlier made an attempt to acquire L&T MF, but the deal hit a regulatory roadblock.

On February 3, Moneycontrol was the first to report that a bevy of asset management firms, fin-tech players and private equity firms had submitted expressions of interest for IDFC MF. HDFC MF, Nippon India AMC, Avendus, Navi MF and Groww were the other suitors named in the report.

 A fourth person added that a clutch of private equity firms are currently in discussions with the shortlisted suitors to provide financial muscle if required and bid jointly as a consortium. To be sure, market regulator SEBI isn’t comfortable with a pure-play private equity fund acquiring a majority stake in a domestic mutual fund. That was one of the key reasons why the Blackstone-L&T MF transaction fell through earlier.

A fifth person told Moneycontrol, “True North, TA Associates, Warburg Pincus, Carlyle and Kedaara Capital are the private equity funds actively in talks to join hands with the strategic players. It is possible that a consortium for IDFC MF may end up having more than one PE firm as a partner.”

GIC and Temasek are shareholders in Bandhan Bank, though it wasn’t immediately clear if they would back the bid or the lender or its holding company Bandhan Financials Holdings Ltd would be the eventual investment vehicle for the proposed deal.

SO WHAT EXPLAINS THE STRONG INTEREST FOR IDFC MF?

According to the Moneycontrol report dated February 3, IDFC MF has around Rs 1.2 lakh crore of AUM, is profitable (PAT of around Rs 80 crore in the first half of 2022) with 64 percent of its AUM in fixed income and 26 percent in equity. For FY 20-21, the firm had reported a net profit of Rs 144 crore, a sharp rise of 81 percent over Rs 79.4 crore, registered in FY20, reports said.

“How often does a top 10 player like this come to the market? That’s rare. It will be great if PE funds can also participate as then valuations will go up. It will provide size and scale to the acquirer,” added the first person saying that initial bids were in excess of Rs 4,000 crore.

According to the fifth person, “It (IDFC MF) is a good fixed income play and there is not much of equity. The team is strong too. But the segment has come under threat due to new age players.”

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All the five persons above spoke to Moneycontrol on condition of anonymity.

On September 17, 2021, the Board of Directors of IDFC Limited and IDFC Financial Holding Company Limited gave the nod to kickstart the divestment process for the mutual fund business subject to requisite regulatory approvals, as applicable. Interestingly, investors had earlier expressed concerns over a delay in the value unlocking exercise. Later, investment bank Citi was taken on board as the sell side advisor for the IDFC MF sale.

In December , IDFC First Bank set the ball rolling for the process of merging IDFC Ltd and IDFC Financial Holding Company with itself. Both entities are part of the bank’s promoter group.

IDFC MF, True North and Citi declined to comment in response to an email query from Moneycontrol. Carlyle, too, declined to comment. Moneycontrol has sent reminders via emails and phone calls and is awaiting responses from the Hinduja Group, Sundaram MF, Invesco MF, Kedaara Capital, Warburg Pincus and TA Associates. This article will be updated as soon as we hear from any of the firms.

IDFC MF SALE: BIDDER STRATEGY

On November 18, Moneycontrol had reported that Prateek Indwar, EVP and Group Head (Investment Banking) at SBI Capital Markets had quit and was headed to Indus Ind Bank to lead the i-banking vertical. The report had added that the private sector lender was eyeing potential initiatives or forays into non - core banking areas and ancillary activities like mutual fund, insurance and other segments.

Industry observers believe that the core business of Bandhan Bank has faced a tough environment in the last two years and segments like asset management and insurance present growth opportunities going ahead. The likes of Invesco MF and Sundaram MF can beef up their existing AUM with the buyout. In fact,  Sundaram MF had already initiated its inorganic growth plans when it acquired Principal MF for Rs 338 crore in January 2021.

Speaking on the rising interest for MF assets in the private equity community, Vivek Soni, Partner and National Leader, Private Equity Services, EY said, “The increasing financialisation of Indian household wealth / savings is an unassailable mega-trend.  As Indian households rebalance asset allocation and move away from being overweight on Real Estate and Gold, more and more capital is expected to flow into financial assets."

Soni further added, “This puts scaled asset management businesses in a sweet spot as they can continue to leverage digital technologies to reduce their distribution and customer acquisition costs, increasing margins over a period of time. PE investors are quick to spot megatrends and so it’s not surprising that Mutual Fund businesses  are attracting a lot of attention from financial sponsors.”

Over the past few years, the domestic mutual fund segment has seen a lot of M&A activity. Other than the HSBC-L&T MF and the Sundaram MF-Principal MF transactions, the sector has also seen deals like Zerodha-backed Groww–India Bulls MF, White Oak-Yes Mutual Fund and Navi–Essel MF.