The private market has been going through a "revolution" over the last six months that has led to slowing down of investments, according to Avendus Wealth Management's Nitin Singh.
"A lot of the money that had flown in, in terms of hedge funds, etc., has dried up to a certain extent. That mad race of capital where the sellers were commanding the price has slowed down," Singh, the managing director and chief executive officer at Avendus Wealth Management, told BQ Prime's Niraj Shah in a special series 'Where Do Millionaires Invest'.
Private markets are going through an "era of consolidation" where leaders that have "good operational excellence, good quality growth metrics, (and) with the right levers in place are going to become bigger", Singh said.
According to Singh, of the 100 companies in a specific sector, 20-25 companies will "die", while 40-50 of them "will go through a little bit of pain over the course of the next one year".
If the companies survive and have built their operational metrices in a way that allows them to go through longer fundraising cycles, they will be able to deliver three to four times alpha over 10 years and around 12-16% returns, he said.
Singh said the balance 15-20 companies will be "all out leaders".
Shift In Focus
The focus of investors in private markets has now shifted from growth metrics to operational metrics, "which means that they will raise money that will continue to flow in, but into fewer names", Singh said.
He advises his clients—who consist of high net-worth individuals and entrepreneurs—to invest in private companies through the fund in early stages.
"For late stage (investing), it is a combination of both direct deals as well as funds. More and more, we are telling clients that you move from direct deals towards co-investment with funds," he said.
According to him, the biggest challenge is finding good late-stage market leadership companies at attractive valuations to take in money directly.
Watch the full conversation here:
Edited excerpts from the interview:
Tell us a bit about yourself.
Nitin Singh: I head Avendus Wealth Management. It is the wealth management arm of the Avendus Group, and we focus on working with entrepreneurs and UHNIs (ultra high-net-worth individuals) and really helping them future-proof their portfolio.
Our biggest forte lies in the fact that we can identify asset classes and opportunities ahead of time. We have built a very strong practice both on the private market side–over the course of the last nine or 10 years–as well as working very closely with families, in terms of advising them on the overall portfolios and being ahead of the curve with regards to insights and ideas.
The market has recognised this, and we are actually recognised as one of the top domestic private banks in India.
What do you do at Avendus? I believe you have assets under management of Rs 45,000 crore, maybe 1,500 families. Tell us a bit about the practice.
Nitin Singh: Avendus is a diversified financial services firm. We are… not only the largest investment bank in India today, but also the largest in Asia, in terms of volume of deals, and we have built out a very core specialty over the course of the last 12-15 years of really working with the entrepreneurs.
The wealth management business was actually founded 12 years ago, and it was basically founded with the philosophy of working with entrepreneurs across the country.
Of the roughly 1,700 odd customers that we have, almost 90% are entrepreneurs. They are all customers who are in the typical parlance of the wealth management industry UHNIs, which typically means at least $5 million plus in terms of financial net worth. They are typically sophisticated people with regards to what they want, the kind of products and opportunities that they are looking for, and the kind of financial understanding that they have.
This business which we set up as an adjunct to the investment bank actually has now blossomed into a full-scale large business.
We are the second largest business for Avendus today. We are in the top five players in the UHNIs Wealth Management segment in India. We have been awarded over the last two years as being the best domestic private bank in India by various forums, including Asian Private Banker, Euro Money, etc.
The hard work that's been put in over the last 10-12 years has really come to fruit over the course of the last two or three years. There are two reasons for that: one is that Covid-19 has played a very interesting role in terms of financialisation of savings and the kind of opportunities that clients are looking for.
Nine years ago, we started our private market practice. We were actually, for want of a better word, the evangelizers within the wealth management segment, in terms of introducing domestic HNI capital to private markets–be it venture capital, private equity, private debt.
But, historically, it was always led by institutional money, similar to the revolution that we saw happen on the public market side, which is that it was led by FIIs, then DIIs coming in, and then you saw this whole retail boom happen. So, we were actually the leaders in that and that really took off to a different segment over the last few years.
The other piece is also that we made a significant amount of investment in becoming a full-stack wealth management platform.
So, I think both the work that we do around advisory, the fact that given our ecosystem across investment banking, across NBFCs and across asset management business, we are ahead of the curve in terms of ideas and insights.
And we have got a very big focus on risk. That has really helped us grow. Interestingly, in the last two years, we have gone from about Rs 23,000 crore to Rs 45,000 crore in a year. We have gone from 1,000 families to 1,700 odd families, and we are the largest third-party syndicator for best-in-class private equity, venture capital and venture debt funds in India.
Over the last two years, we raised Rs 8,000 crore of risk capital, just from our clients alone, which is getting deployed in the markets. So, when clients are looking for a player who is ahead of the curve with regard to insights, who has a sense of opportunities, who is also measured in terms of the risk profile, and has diligence and full platform business, they have started looking at Avendus.
What has been your advice or the average millionaire client's response to what the portfolio allocation should be across the various investing options available?
Nitin Singh: Interestingly, clients have matured over the course of the last few years. I was laughing that during Covid-19, especially over the last 12-18 months–let's count out the last 6-7 months which have been about turmoil, etc.–but before that, the only thing that didn't turn to gold in the market was gold.
Everything else that you touched–fixed income, equity returns, private equity, venture capital–was booming. And then, there was a large dose of reality that happened over the course of the last 6-7 months, where for a combination of factors–be it macroeconomics, Russia-Ukraine (crisis), earnings, the general change in sentiment–it's a very different investing market today.
What I am very surprised with this time, as compared to 2008, 2010-12, etc., is some maturity that I have seen with regard to clients.
The millennial clients typically are doing two things. One, they are being very thoughtful with regard to their portfolio asset allocation. So, you have seen a little bit of FOMO happen over the course of the last one year. And you have seen a little bit of imbalance in client portfolios everywhere because there's always a little bit of an element of greed and this time you didn't see people go in one extreme.
So, to give you a sense, the trend in the last one year was that a lot of people have been loading up on direct deals in the private market space. People had loaded up on equity and because it was going up, people had not booked profits, etc.
People were loading up on private debt and therefore, typically, the risk curve had moved because people were very optimistic about what was happening in India. I think what has happened over the last 5-6 months is reality has caught up, so there are three or four things.
I am a huge India bull, going ahead in the next five years, and I believe that today is a great opportunity, basically looking at two things–one is valuations are becoming a little bit more reasonable, the pain is still not out completely. I still believe that this pain will continue for the next 6-7 months, but I think there's some level of realism and reality coming to public markets.
There's a great trading opportunity that's emerged in good quality fixed income, because now you are seeing AAA at a much higher spread than what you saw historically.
I think the third thing that has happened is that there is a dose of realism that's come in private markets where from it being a seller's market, it is slowly shifting towards looking at operational excellence... looking at it being a buyers’ market, and interestingly, clients are perceiving that to be the same.
The clients this time are not worried, not reacting adversely. People are looking very seriously at portfolio allocation… So, this time, I have seen a much more measured approach, both with regard to… people keeping some money on the sidelines as well as how they are getting back into opportunities.
You believe that there could be a good risk reward in both high quality fixed income and equities per se, even though there might be some bit of pain and reallocation to private markets as well. Versus what may have been the case 12 months ago, is there a change in the percentage allocation? What is it that you or your firm are telling your clients to do in their portfolios?
Nitin Singh: We are telling our clients very simply that rather than looking at conventional asset classes, it is very important to look at your portfolio, in terms of three pieces.
The first piece of the portfolio–the safety net–which is a portfolio which will, even if the world comes to an end, be protected, will give you income, will give you yield, will give you whatever. And depending upon your risk appetite, depending upon your need for liquidity, that will vary between you and me. Typically, that portfolio will never beat inflation because it's ‘fill it, shut it, forget it, be safe completely’.
The second part, and that typically ranges anywhere between 5-20% of client portfolios depending on the liquidity needs, is typically the market-linked portfolio.
The market-linked portfolio varies across fixed income, REITs, InvITs, mutual funds, public equity, large cap, mid cap, small cap. But that's where all of us are spending the bulk of our time to say that if the market delivers 6-8-10% return, how do I ensure that I am getting a 2-3% alpha–which is why you tend to work with managers, you tend to identify stocks,... and that's where everyone's energy goes.
The third part of the portfolio is the strategic portfolio, which is a little bit more illiquid (in) nature, which is typically supposed to provide you that 15-18-20-25-30% alpha, which for entrepreneurs includes stakes of their own company's strategic investments, private equity, venture capital, venture debt, real estate.
What we are telling our clients is that a first thought over what allocation between these three buckets should be.
Typically, what we end up telling people is that a third bucket should be anywhere between 20-30% of your portfolio if you are, let's say, a moderate to aggressive client.
The second thing is that the one thing that is shaping India today is the digital revolution. We firmly believe that over the next 10 years, the kind of value creation that's going to happen in India.
To give you a sense of the last 10 years, you saw value creation of roughly $1.5 trillion happened across private and public markets.
Before that, the number was similar, maybe a little lower. Our thesis and our premise is that in the next 10 years, you will see that being tripled on the back of what's happening structurally, which essentially means that you need to have presence across these two spaces. A large amount of that is what will lead to digital companies. Now, whether it's private or public doesn't matter because a lot of these companies will go through the cycle and will become public at a point of time.
But, as a UHNI, as a millionaire if you want to future-proof your portfolio–and I use this word a lot because entrepreneurs understand future-proofing their businesses–they need to understand how to future-proof their portfolios as well.
For future-proofing your portfolio, you need to have at least 20% allocation to such businesses over a period of time. If you are at zero today, it will take you 3-4 years to build up but you must. That is what will drive the next level of growth.
The second piece that you tell your clients is that perfect markets–markets are becoming more and more perfect if you look at public equities, if you look at traded fixed income. Globally, perfect markets provide you only so much opportunity to make alpha.
But you need to be exposed to that, you need to have a 60-70% exposure to that, but it's really imperfect markets and imperfect opportunities that will provide you the opportunity to make alpha. But you need to have a blend between them.
The third piece is we are bullish on large cap today, we are saying be within your equity portfolio, be exposed to 60-70% large caps. We believe that this is high quality, fixed income. There is a great opportunity today to fill up your portfolio with good AAA tax-free because you have not seen these yields, if you want to lock it and hold it.
We are bullish on venture debt, an interesting category, because if you are saying that there is pain on the venture capital side of it and if fundraising cycles are going to get elongated, therefore, the cost of raising venture capital is much higher than the cost of raising venture debt and good quality companies can get in.
So, we still continue to be bullish on good quality digital venture capital and consumer venture capital themes.
What has happened for pricing perspective in the market is that you basically have been set back by a year, basically seen 20-25% decline in pricing across the market.
But today, we have raised Rs 8,000 crore as risk capital. Of that, only Rs 2,000-2,500 crore have got deployed. The rest Rs 5,500 crore is still sitting as dry powder to be called upon.
When I talk to fund managers, they are telling me two things. One is that there is greater sanity. They have pricing power. They are looking at higher quality companies. There is more and more focus on companies, on operational excellence and lasting the life cycle.
There will be consolidation over the course of the next one year because a lot of the companies will end up consolidating into market leaders. So, to be somebody starting with cash or coming into the market today, it's a great time. Have you lost about a year of return? That's fine, but for a 10-year fund, it doesn't matter.
What are your clients coming to you for because these are informed clients? Where is it that they are coming, asking you to hunt for, or to get them deals that maybe you have, maybe you don't?
Nitin Singh: So, there is limitless appetite today of clients for good quality private debt. By private debt, I am going a little up the curve when I am talking about the companies where clients are willing to invest behind companies which are giving 10-11-12-13-14-15% yields, but good quality names backed by good quality players with good quality assets on the balance sheet.
There is a limitless appetite for clients today to get in. Interestingly, I was thinking that the trend will change a little bit with markets coming down, but that continues to remain. The reason for that is fixed income is such a large portion of large clients’ portfolios.
When you are a multi-millionaire, the biggest piece for you is wealth preservation of your generations. Whether you like it or not 40-50% of your portfolio will continue to be fixed income, and fixed income as an asset class today has become much more complex than even equity.
People don't realise that actually, but you can bucket fixed income into 15 sub-asset classes if you want to. There is limitless appetite for good quality mispriced opportunity and the clients are willing to take substantial bets.
The second piece that I am seeing is clients are now invested and interested and asking that give us good quality equity names to buy directly, public equity names to buy directly.
A lot of the large family offices, interestingly, don't come to managers any longer. They hold their own large public equity positions. So, when you go and talk to an entrepreneur, he will talk to you on funds, on PMS (portfolio management services), he will understand everything.
But on direct equity stocks, he would have built his own portfolio, he has his own thoughts, he will have members of his team only doing that because their sense is very acute with regards to good opportunities on public equity.
The third trend that we are seeing now is a gradual shift towards clients wanting to invest globally. It was a conversation point for the last 2.5 years. But you have seen a lot of numbers go up slowly.
The SEBI limit got breached and clients are looking at global equity opportunities today. It's still not become sizeable in client’s portfolios; it is including the offshore exposure that domestic funds will also have in most large-cap portfolios…
But the clients were seriously saying that we want to build it out–and not because in the olden days that I want to send my money offshore–but because I am actually looking at it as a substantial part of my asset allocation.
So, I think the fourth piece is contrary. While we have seen a decline, clients wanted to do direct deals on the private market side because a lot of it was late stage, etc. But there is still demand for good, discovered portfolios and good managers, where clients can see a story, and also on the consumer side–especially on the consumer side–on the technology side, on the SAS side.
People are taking a little bit longer for decision-making but clients are still interested.
I believe you guys are fairly large in the private markets space. Private markets were a very big thing and probably still are. What is the current situation? What is the appetite or the foresight that some of these clients have because in this space, the client also gives you a lot of insights because their equities, their businesses may not be listed, but they have a sense of what's happening in the private markets?
Nitin Singh: There has been a revolution, in the other way, in the private market for the last five or six months.
A lot of the money that has flown in as hedge funds, etc., has dried up to a certain extent. That mad race of capital where the sellers are commanding the price has slowed down.
There are three trends that are shaping what’s happening. One is that this is going to be an era of consolidation. Market leaders with good operational excellence, with good quality growth metrics, having the right levers in place are going to become bigger.
Let me take a step back. We believe that if there are 100 odd companies today that are there within a particular space, roughly about 20-25 of them are going to die. Roughly another about 40-50 will go through a little bit of pain over the course of the next one year.
But if they are able to survive, and if they are able to ensure that they have built their operational matrices, in a manner where they are ready for the longer fundraising cycle, they will deliver the typical three to four times alpha over 10 years, the typical 12-14-15-16%.
The remaining 15 or 20 names are going to be “all-out leaders”. That thesis has not changed.
What this market and the scenario in the last few months has removed the froth out of the market.
The second piece that is happening is that there is more and more focus on looking at operational matrices of these companies rather than growth matrices alone, which means that they will raise money that will continue to flow in but into fewer names. Which means that there are two things that have happened. What we are telling clients is that in the early stage, you have to go through funds, because it's a portfolio approach. There's a good opportunity today to do that, and the clients are recognising that.
But as is typically the case in any cycle which turns out the other way, it takes a little bit longer in decision-making because the FOMO effect has gone away. It's a large thing.
The second piece that is happening is that for late-stage, it is a combination of both direct deals as well as funds. More and more, we are telling clients that you move from direct deals towards co-investment with funds because the biggest problem today is finding good late-stage market leadership companies at attractive valuations to take in money directly.
The exception is an asset like NSE which is almost a commodity. It's very difficult for even large HNIs to have access and also increasing the risk. So, I am still bullish about this space actually. Actually in times like these you are able to find opportunities because the great thing is that you are locking your money into vehicles. The one thing that is the biggest enemy of value creation is constant activity.
I always tell clients that the biggest enemy to long-term allocation in your portfolios is the fact that you want to do activity in your portfolio.
You look at BQ Prime every day and see pricing, and you will say should I do something. The moment you stop that, you are invested in good quality companies and accordingly it gives you compounding.
Are you telling people to keep some gunpowder dry across asset classes for slightly better opportunities ahead or do you believe that now is the time when you can start deploying, if not completely deployed?
Nitin Singh: We have been investing at gradual dips within our portfolio but for clients who are coming in, who are completely cash today.
We are typically saying a gradual deployment over the course of the next six months to a year, across asset classes.
For a lot of clients who have created some gunpowder, if not gone all in yet, they will take a period of six months to go all in. Especially on the public market side as well as fixed income, there is still more to play out, and that is 70-80% of client portfolios.
On the private market side, that thesis doesn't really hold true because it's anyways deployed over a period of time.
So, when a client is making a commitment today, typically, he is taking two years–be it a venture debt fund, venture equity fund, a private equity fund–anywhere from 1.5 to 3 years is a typical life cycle for him to draw down a fund. With managers, too, we are seeing that they have been reticent and hesitant about trying to put in large blocks of capital, and even they are taking a little bit longer.
So typically, yes, the answer to this is it's a gradual approach across the portfolio. It's a great opportunity to ensure that you get out of losers into potential winners.
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