Due to entrepreneurial dynamism and vision, some of the sunrise, innovation-led, cutting-edge businesses in India are run by entrepreneurs ....
Ever thought of aligning your interest with entrepreneurial firms or family-owned businesses without actually getting in to the nitty-gritty of running these companies? ASK Investment Managers present you an opportunity to invest in entrepreneur-run businesses listed on the Indian bourses to build wealth over the medium-to-long term.
The ASK Indian Entrepreneur Portfolio requires a minimum ticket size of Rs 50 lakh and a lock-in of three years. The fund is expected to generate an internal rate of return of 22-25 per cent, what with a high growth portfolio, says Mr Bharat Shah, Director, ASK Group.
In an interview with Business Line, Mr Shah highlights the features and investment strategy of this fund. The offer closes on January 29.
Excerpts from the interview:
How would you define family-owned businesses or entrepreneurial firms?
Listed companies where entrepreneurs or families represent a unique class of Indian shareholders (with at least a 26 per cent promoter or family shareholding being desirable), who are long-term investors and control senior management positions involved in decision making and running the business would form the investment universe for this portfolio scheme.
What would be the size of the opportunity in the listed space?
Entrepreneurial/family owned businesses accounted for 61 per cent of the market capitalisation of the top 500 companies in 2009.
As against this public sector undertakings accounted for 23.5 per cent of this market-cap and multi-nationals 10.8 per cent. Banks have been excluded for definitional consistency.
What are the parameters that would go in to assessing the investment universe of entrepreneurial firms for this fund?
We use a combination of both qualitative and quantitative parameters.
Quality of management, size of the business opportunity in which the company is operating, minimum growth rates, requisite size of operations, promoter's equity holding, debt and equity ratio of the firm and a given minimum level of capital efficiency could be some of the parameters for selecting a company.
Which sectors in India are predominantly still closely-held by Indian entrepreneurs?
While Indian entrepreneurs are present in a broad spectrum of sectors, they have made their mark in new age businesses like pharmaceuticals, information technology and telecom, among others.
Due to entrepreneurial dynamism and vision, some of the sunrise, innovation-led, cutting-edge businesses in India are run by entrepreneurs rather than by public sector or multinational segments.
Closely-held companies have suffered during the financial crisis and mounting debt has been a cause of concern. Do these firms carry higher credit risk?
In some of the cases of entrepreneur- or family-owned firms, the control issue can affect the capital structure of a company. In other cases, funding requirements due to high growth nature of some businesses may mean higher debt or equity ratios.
The investible universe chosen will however be based on certain parameters among which a conservative debt or equity ratio along with high capital efficiency ratios is a must.
Both MNCs and Public sector firms, receive support of their parent, in terms of funding as well as business opportunities. What USP do entrepreneurial firms carry?
Entrepreneurial firms carry – the most crucial aspect of all – the promoter's own skin in the game, which is not the case with the top management of public sector undertakings and multinational companies.
Basically, the promoter's interests are aligned with those of the shareholders.
That coupled with the dynamism, passion and calculated risk-taking capacity which they bring to the table makes the difference in the final analysis. This is apparent in the quantitative research which we did that highlights the high growth rates in turnover and operating profits that these firms enjoy as against multinational companies or public sector undertakings.
Would you invest in companies that are cash-flow negative or have not even reached a break-even?
It is possible that such investments are made in exceptional circumstances, especially where the operations may be affected temporarily or the company is in its formative years.
Cases of poor disclosures, centralised control and governance-related issues surround entrepreneurial firms. How does ASK plan to manage these risks?
The investment universe for Indian Entrepreneur Portfolio will consist of stocks with proven track record and hence care will be taken to see that they meet certain minimum standards of corporate governance. The universe will be actively reviewed and close interaction with the management will form a crucial part of the investment process to see that they maintain those standards on an ongoing basis.
Would the new portfolio actively participate in the management decision of the firm?
The fund will not have an ‘activist' role in the investee companies. We manage the portfolios actively in the sense that we are constantly interacting with managements to understand their plans and track their progress.
However, we eschew rendering advice to them on their businesses.
What is the term of the portfolio scheme and what are your internal expectations if return over this period?
The tenure of this portfolio would be three years. In the event of our achieving the set portfolio objective earlier, the fund may be closed before the tenure of the scheme.
As the portfolio will have a high growth bias in the investee companies, we expect an IRR of 22-25 per cent at the end of three-year period.
Have you identified specific sectors or regions that you would like to invest or stay away from investment?
Our approach is bottom-up stock picking rather than top-down.
Having said that, once we like a particular business, we do put a macro overlay to the sectors and industries in which the company operates to know whether the size of opportunity is large enough for the company to attain promising growth in the coming years.
Over what period would the money be deployed?
Depending on the market situations, we expect to construct a portfolio in five to six weeks.