Japanese life insurance major, Nippon Life Insurance, on Thursday signed a memorandum of understanding (MoU) to acquire a 26 per cent stake in Reliance Capital Asset Management (RCAM) for Rs 1,450 crore. This is the largest foreign direct investment in the Indian mutual fund sector. RCAM is part of the financial services arm of Reliance Capital, an Anil Dhirubhai Ambani Group company.

According to a press release, the largest life insurer of Japan valued Reliance Life Insurance at around Rs 5,600 crore ($1.1 billion), or roughly 6.64 per cent of total assets — which is higher than the deals that have taken place in the industry in the last couple of years. Morgan Stanley advised Nippon on the deal.

Goldman Sachs bought Benchmark Mutual Fund at a reported amount of Rs 130.5 crore, giving it a valuation of 4.1 per cent of assets. In September 2009, L&T Finance had bought DBS Chola Mutual Fund for Rs 45 crore, or 1.5 per cent of assets. The only deal that comes close to such a valuation is IDFC’s purchase of Standard Chartered Mutual Fund in 2008. The company had paid Rs 831 crore, or 5.7 per cent of assets.
 

In the mutual fund segment, deals are valued on the basis of a fund house’s asset mix, network strength, long-term earnings prospects and profitability. Typically, the higher the amount of equity AUM over the long term, the more the valuation. This is because equity mutual fund schemes earn better commissions than debt and other fund categories in a given tenure.

This is the second stake sale in the company. In 2008, hedge fund manager Eton Park Capital Management had purchased a 4.76 per cent stake for Rs 501 crore, paying the fund house 13 per cent of its AUM. RCAM, India’s second-largest AMC in terms of assets under management, managed Rs 84,299-crore assets as on December 31. Though HDFC Mutual Fund has become the largest player in terms of assets, Reliance emerged as the most profitable mutual fund house in 2010-11, with a net profit of Rs 261 crore, while HDFC reported net profit of Rs 242 crore.

“We are delighted to have Nippon as our strategic partner in the mutual fund business. They are already our partners in the Life insurance business. The mutual fund partnership cements and strengthens the relationship between Reliance Group and Nippon Life further and takes it to a new level, said Reliance Capital chairman Anil Ambani. “This investment is our second capital alliance with the Reliance Group, following our investment in Reliance Life last year," said Nippon Life president Yoshinobu Tsutsui. In March last year, the Japanese insurer had picked up 26 per cent in Reliance Life, the life insurance arm of R-Cap, for Rs 3,062 crore. That was the largest FDI in the Indian insurance sector. The transaction pegged the total valuation of Reliance Life at approximately Rs 11,500 crore ($2.6 billion). Nippon Life, Asia’s largest private life insurance company, which managed assets worth $600 billion (Rs 30 lakh crore), posted revenue of Rs 3,49,834 crore ($80 billion) and a profit of Rs 12,199 crore ($3 billion) for the financial year ended March 31, 2011, the release added.