Four key takeaways from the Sundaram-Principal Mutual Fund deal

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Sundaram Asset Management Co., a 100 per cent subsidiary of Sundaram Finance, on Thursday evening announced the purchas of the AMC business of Principal Asset Management for Rs 338.53 crore. The deal, struck at 4.5 per cent of the Rs 7,447-crore assets managed (AUM) by Principal, adds product and distribution muscle to Sundaram, which itself manages about Rs 40,000 crore across mutual funds, portfolio management services (PMS), alternate investment funds (AIFs), global funds and advisory mandates. With this transaction, Principal MF exits the India market two decades after setting up shop in 2000. Here are four key takeaways from the deal.

 

Valuation

The Principal-Sundaram deal valuation is comparable on a market capitalisation to AUM metric of UTI AMC (which trades at over 4 times). Much larger listed AMCs such as HDFC Asset Management (15 times ) and Nippon India Asset Management (9 times) trade at a premium. The deals seems to be a bit expensive, as Principal AMC manages just about five per cent what UTI AMC manages. It might have got a similar valuation due to 90 per cent of its AUM being in equity-oriented schemes, which tend to generate higher fund management fees compared to debt funds and passive funds. In terms of revenue, Principal AMC reported yearly income of about Rs 50 crore each in the last three years (FY18-20), which indicates a deal valuation of 6.7 times annual sales.

Product, reach boost

The acquisition of Principal’s AMC business helps Sundaram go past Invesco MF and close in on Edelweiss MF in terms of asset size. Principal has a bouquet of 10 equity funds, the biggest being Principal Emerging Bluechip. Four equity funds, such as Principal Small Cap, Principal Emerging Bluechip and Principal Tax Savings, are ranked within the top seven in their respective categories on a one-year basis. There are a couple of Principal equity schemes in the top 10 club in their individual buckets on a three-year basis.

While Sundaram AMC has its highest AUM in its mid-cap fund ( about Rs 6000 crore), the Principal deal will add heft to Sundaram’s presence in the large and midcap category and aggressive hybrid categories. Principal manages about Rs 3,500 crore between these two categories. When the integration happens in 6-7 months’ time, Sundaram will leverage the Principal AMC platform to widen its reach. Principal MF serves over 5.5 lakh customers and works with over 20,000 empanelled distributors across the country.

Unit holder implications

As per SEBI rules, an AMC can have only one scheme under each category, barring a few exceptions including, index funds/ETFs tracking different indices, sectoral /thematic funds. So, schemes in categories where both fund houses have a presence will have to be rationalised. For instance, Principal Tax Savings and Sundaram Diversified Equity fall in the ELSS category. Principal Emerging Bluechip and Sundaram Large & Midcap fall in the arge and midcap space. There are also overlaps in largecap, midcap, multicap and smallcap categories. In debt schemes as well, there is an overlap in low duration, liquid, short term and ultra short term.

Essentially, a merger between two mutual fund-houses also means a merger of similar schemes. In case of a merger, one scheme (transferor scheme) will cease to exist once the merger is over. Every investor will also get a zero load exit option when the scheme merger happens. Investors of both Principal and Sundaram funds can look out for a written communication about the change from Sundaram MF.

‘Quit India’ trend

Lastly, Principal AMC’s exit marks yet another foreign fund-house throwing in the towel. Over the years, JP Morgan Asset Management (India), Deutsche Asset Management (India), Goldman Sachs, Fidelity, Morgan Stanley, ING, PineBridge, etc. have quit the Indian market.

In a market dominated by giant-sized fund houses with legacies in the banking or insurance business, foreign AMCs have found it hard to get a foothold. Most have shown an inability to grow beyond a certain size. The only notable exception to this trend has been Franklin Templeton, which, though, is mired in a controversy the closure of six debt funds.