HSBC is in talks to buy the mutual fund arm of L&T Finance Holdings for Rs 2500 crore – Rs 3000 crore to grow its asset management business in India as part of its Asia strategy to double down on the wealth management business, said multiple sources aware.
Private equity firm Blackstone has been looking to acquire L&T Mutual Fund, but the deal has not fructified due to differences in valuations and pending regulatory approval. L&T has been looking to exit several of its non-core or sub optimal businesses to deleverage its consolidated balance sheet.
L&T, L&T Finance Holdings and HSBC spokespersons declined to comment on market speculation. Sources said, the transaction is with the stock market regulator for approval.
L&T Mutual fund ranks no 12 in the 43 player Indian mutual fund industry with total assets under management of Rs 77,608 crore as of July 31 of which equity assets account for Rs 38,807 crore. HSBC on the other hand, ranks 23rd in the industry with assets of Rs 11,211 crore, with equity assets account for Rs 3369 crore.
The top 10 players account for 82% of the industry’s assets under management.
L&T Mutual Fund had bulked up the business, acquiring assets of DBS Cholamandalam Mutual Fund in 2009 and then Fidelity in 2012. The business grew significantly under its chief investment officer (CIO) Soumendra Nath Lahiri between 2012 and 2019 before he left in 2019. Interestingly Lahiri had joined hands with PE firm Chrys Capital to bid for the business but were out bidded by Blackstone in what was to be the first buyout of an Indian AMC by a foreign non-mutual fund company. However Sebi did not bless the transaction. As per the extant norms, any entity with 40% or more stake is classified as a sponsor in an AMC and such a sponsor needs to comply with the eligibility criteria stipulated by Sebi. The regulatory restrictions prevent any PE player from acquiring more than 39.99% in an AMC business.
Axis mutual fund and IIFL Mutual Fund and Avendus Capital Pvt. Ltd. had also thrown their hat in the ring to buy the business from L&T after a formal sale was launched by Citigroup and JP Morgan in late 2019.
Unlike bank based mutual funds like SBI, HDFC, ICICI, Kotak, Axis, union, Canara, BOI, IDFC and BNP, L&T does not have any captive distribution arm.
As per regulations, a mutual fund can have only one scheme in each category. With both L&T and HSBC having schemes in key categories like large cap,large and Midcap, mid cap and small cap, focused categories they may have to merge schemes. “The major client base of HSBC is its bank clients, and this acquisition could give access to a new set of customers,” said the CEO at a domestic fund house. “The industry is seeing an evolution in terms of the product structure being offered. On one hand we have newer players coming in with passive investing ideas and then there are traditional players who are active management proponents. As investors shuffle between these ideas, a consolidation may well be in the making over the next few years,” says Vidya Bala, Founding Partner, Prime Investor.
Earlier in the month HSBC agreed to acquire Axa’s insurance assets in Singapore for $575 million to scale up its insurance and wealth business. “This is an important acquisition that demonstrates our ambition to grow our wealth business across Asia. Wealth is one of our highest growth and highest return opportunities, and plays to our strengths as an Asia-centred bank with global reach,” Noel Quinn, Group Chief Executive of HSBC Holdings, said in a statement after the acquisition.
Prior to that in July, HSBC Asset Management took a minority stake in Radiant ESG, a US-based, ESG and diversity and inclusion (D&I) focused consulting firm co-founded by Heidi Ridley and Kathryn McDonald, former CEO and Head of Sustainable Investing at Rosenberg Equities respectively. With HSBC Asset Management’s backing, Radiant ESG will become RadiantESG Global Investors, a female-owned, independent asset management firm focused on next generation ESG investment opportunities for institutional and we wealth management clients worldwide.
“The bank has made a billion dollars of profit from India alone last year almost equal to China and thus has the global buy in to double down in the country. There are restrictions in trying to grow via a branch network, so we want to grow the retail business via wealth and AMC is a key pillar in that,” said a senior executive on condition of anonymity.
The MF Industry’s AUM has grown from ₹ 15.18 trillion as on July 31, 2016 to ₹35.32 trillion as on July 31, 2021, more than 2 fold increase in a span of 5 years. Analysts at ICICI Securities estimate the Indian MF AUM to grow at 15% CAGR between 2021 and 2030 to touch Rs 100 lakh crore.
L&T has been proactively seeking to derisk the balance sheet through a series of divestments. L&T has initiated an exit from its 51% holding in L&T Infrastructure Development Projects (L&T IDPL). It has sold a 99 MW hydropower unit to ReNew Power for Rs 985 crore. In its August 25th edition, ET also reported the engineering group is in talks with NIIF for a Rs 4000 cr investment in its Hydrabad Metro project.