Nomura buys stake in India's LIC Mutual Fund

Japan's Nomura Asset Management on Saturday announced it will acquire a 35% stake in India's LIC Mutual Fund for an undisclosed amount.

LIC Mutual Fund (LICMF) was established in 1989 by the Life Insurance Corporation of India (LIC), India's largest life insurer which is government-owned.

LICMF had Rs324 billion ($6.7 billion) of assets under management (AUM) as of June 2009, up 74% from its AUM of Rs186 billion a year earlier. Based on its current holdings, LICMF is currently ranked seventh in the Indian asset management industry with a 4.8% market share. Parent company LIC manages investments of around $167 billion, through more than 200 million individual life insurance policies.

Nomura Asset Management Company is a wholly owned subsidiary of Japan's Nomura Holdings with $192 billion of assets under management as of March 31, 2009. Nomura already has a presence in India in global markets, investment banking and merchant banking. "This new joint venture will further enhance Nomura's commitment and service offering in the Indian financial services market," the two companies said in a written statement.

LIC will now own 45% of the asset management businesses, LIC's listed subsidiary, LIC Housing Finance, will own 20% and the balance 35% will be held by Nomura.  

The parties did not disclose details of the amount Nomura will pay for the 35% stake, which it will acquire through a combination of a sell-down of existing shares and the issuance of new shares. However, on June 15, LIC Housing Finance informed the National Stock Exchange that it was selling 19% of its holding in LICMF for Rs1.4 billion. The price at which LIC Housing sold its shares implies an equity value on an undiluted basis for LICMF of Rs7.4 billion. If Nomura was to pay that same price for its entire stake, the outlay would be around Rs3.7 billion ($76 million).

The acquisition is subject to necessary regulatory approvals as well as the approval of existing unitholders of LICMF.

LICMF is following the lead of a number of government-sponsored mutual funds which have already forged partnerships with global firms. In November 2004, SBI Funds Management, the mutual fund promoted by India's largest bank, the State Bank of India, sold a 37% stake to Societe Generale Asset Management. In 2008, Canara Investment Management Services, a mutual fund promoted by public sector bank Canara Bank, sold a 49% stake to Netherlands-based Robeco Group.

"India is one of the fastest growing markets for asset management in Asia and is key to Nomura's push to be a world-class asset management firm with a strong competitive advantage in Japan and Asia," Atsushi Yoshikawa, president and chief executive officer of Nomura Asset Management, said in a statement.

Earlier this year, the financial institutions practice of global consulting firm McKinsey released a report on the future outlook of the Indian asset management industry. McKinsey estimates that India's asset management industry grew 47% year-on-year between 2003 and 2007 to reach assets under management of over $92 billion in March 2007.

McKinsey also suggests that operating profit at 0.32% of AUM in India is relatively higher than in other markets such as the UK (0.12%) and the US (0.18%), despite a higher cost structure in India. The higher operating margins coupled with a lower penetration of mutual fund products in India than in the developed world are attracting global players to the Indian asset management industry.

McKinsey expects the winners in asset management to be players with strong distribution networks and well-entrenched brand recognition. And this is what probably attracted Nomura to LICMF. LIC's retail marketing network comprises 1.3 million agents operating through 2,048 branches and other alternative distribution channels. And as India's largest life insurer, the LIC name is well-established.

"For LIC MF, Nomura's product management and investment management capabilities along with its global research expertise will help it compete with the top asset management companies in India," said consulting firm Celent in a written update after the deal was announced. "The possibility of an offshore fund by LIC MF is also on the cards since India is one of the few economies with a good growth rate. Nomura, with its international presence, will provide easy access for foreign investors to invest in the Indian markets."