It’s been more than a year since the Securities and Exchange Board of India (SEBI) issued the framework permitting private equity firms to sponsor mutual funds but so far it has found no takers among PE firms, who may be hesitant due to the array of additional requirements and volatile market conditions, according to market experts.
In July last year, the regulator said it wanted to facilitate new types of players to act as sponsors of mutual funds to encourage fresh flow of capital into the industry and foster competition, while also providing ease of consolidation and exit for existing sponsors. Among pooled investment vehicles, only PEs have been allowed to sponsor MFs.
Limited Scope
“The scope of mutual funds is limited as it only invests in listed securities,” said Moin Ladha, Partner at law firm Khaitan & Co, pointing out that the framework aimed to create a bridge between “mutual funds and alternate investment funds and provide an asset class which is more retail investor centric.”
Private equity firms are more likely to enter the mutual fund sector through acquisitions of existing asset management companies rather than building one from scratch. “With many PE firms holding minority stakes in mutual fund companies, this regulatory change was expected to simplify exits for existing sponsors, attract new talent, and enhance strategic guidance,” said Siddharth Arora, Director, and Head of Products & Research at Equirus Wealth.
“Yet, the array of additional requirements and uncertain market conditions may have impeded PE firms’ entry into mutual funds. Compliance with financial disclosures and governance standards demands time and effort,” he added.
Compliance Hurdles
SEBI regulations have stipulated safeguards, such as no off-market transactions between the schemes of the mutual fund and sponsor PE or schemes, funds and investee companies of schemes and funds managed by the sponsor PE, where it has more than 10 per cent stake.
Such restrictions could delay the entry of PE firms in this segment, said Arora.
“It is about separating that conflict of interest,” said Kaustubh Belapurkar, Director and Manager of Research, Morningstar Investment Research India on the safeguards. He added that based on his understanding of the sector, there were PE players who would be interested if in the future AMCs were put on the block now that regulations permit them to be sponsors. They could also team up with a fund manager with a track record to set up a fund. “I don’t think PEs are shying away from it.”
M&A landscape
The most recent M&As in the sector occurred in 2022, the last one being that of the Bandhan-led consortium acquiring IDFC Mutual Fund. No AMC has come up for sale post the framework.
Though the sector already has 44 players, it is attracting more players, both global and local, said Belapurkar, testifying to the opportunities in it.
“If the new asset class is built in a way where the strategies are similar or analogous to what a PE/ VC fund does, then we could see PE funds sponsoring an AMC,” said Ladha.