Why is a 4-year-old startup acquiring a 14-year-old company?
Mutual Fund acquisitions will be the new trend in the fintech space. Why? Read on.
It does not matter how long you've been in business. What matters is how deep you are in its affairs.
Groww, a 4 year old startup, started by four Flipkart employees to simplify investing, is acquiring 14 year old Indiabulls Asset Management Company (its mutual fund arm) for Rs. 175 crores.
How did this happen?!
Both companies have different visions. This transfer of business will help them grow in their individual paths.
Groww is catering to a market of 1.5 crore customers and is already in the Mutual Fund (MF) distributor game. Now, imagine what it could achieve with its tech prowess if it could also be an AMC?
It can reduce the cost of operations and penetrate a market that is set to grow from Rs. 30 Trillion in 2020 to Rs. 50 Trillion in 2025. Today, this market is only 8-9% of the total household financial savings of the country. Who will let go of such a plum opportunity?
Well, the AMC business is not as lucrative for traditional companies such as Indiabulls. Their cost of distribution increases extensively when they try to reach investors in smaller towns. And so it wants to focus on building the company’s real estate asset management business through Alternate Investment Funds (AIFs). AIFs pool funds from big investors. Thus, they don't require a lot of resources required by a Mutual Fund, that pools funds from a large number of small investors.
This will help Indiabulls in keeping its business asset light while earning good returns.
Now, this might be the beginning of an acquisition spree in this space. But, how do we know that more such acquisitions are going to happen?
Because, it was only a few months back when SEBI changed the regulations that prevented these young startups from entering the AMC business.
Earlier, the law required a company to at least have a net worth of Rs. 50 crores and a continuous profit to become a registered AMC. And, the profitability clause was impossible for the startups to meet.
But now, a company can enter this space if it has a net worth of more than Rs. 100 crores, even if it is not profitable. This move has opened the field for startups who already have deep pockets, courtesy of the funding they get.
While Groww has taken the inorganic route to enter the space, other startups like Mobikwik and Zerodha have applied for their own license with SEBI.
Which fintech (broking company) will make the next move? Let us know in the comments!
We have discussed the change in SEBI’s regulation and its impact on fintech and mutual fund companies in an earlier post, check it out.
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