Monday, May 12, 2008

When it's other people's money....monkey around

My logic hasn’t been out of place entirely. I had this belief that if I have to make it big as a fund manager or in Private Equity, I need to be a good judge of an early investment opportunity. I was too dumb not to take the easier B-school route to PE superstardom. Instead I began using my sparse savings and tried out my luck investing in the stock market to prove myself in an old fashioned way, back in 1995. If I can win with my money, I could do it with others' as well. I needed that validation.

Till date, my least lucrative exit over a one year horizon has been at an ROI of 165%. Now as I told you I started with my sparse savings and I was totally aware of the need to stay liquid to buy into the next opportunity; hence my horizon was restricted to just one year (so that my returns come tax free).

Then come the PE champion investors. I marveled at the ability of these guys that raise huge funds and thought they must be wunderkinder notching up stunning returns. I looked up their profile and thought the degrees from Harvard and Wharton must have magic in them. Everyone had an Ivy League record and some excellent career profile. No wonder they are where they are – right at the top of PE fund houses. Moreover since PE being alternative investment thro negotiated deals, they have access to classified information (`insider information' if I have that) besides some special rights granted by covenants built into term sheets (such as veto, tag along, pay for play, ratchets etc. etc.)

So I thought the game’s up for average folks like me. How do I stack up if the game starts with such a mighty disadvantage? I began to watch their investments in Indian companies (that I relate better) and often wondered why they take exposures in companies at such high valuations. “Silly, they’re from Harvard and Wharton; they are not dumbasses”. “May be, they see value that you don’t - they have access to classified information, you know?” I taunted myself.

But today I read this. The portfolio companies where PE funds invested are all trading at steep discounts to their acquisition price and now the same PE funds are on a Rupee cost averaging spree by mopping up shares from the secondary market to even out the gap. Apax partners bought 11.41% in Appollo Hospitals at Rs.605/- a share. Now they are buying from the market at Rs.505-550 a share hiking their stake to 14.52%. Several others including Standard Chartered PE (in M&M Financial services), Blackstone in Gokaldas partners, Promethean in Nitco Tiles/EIH, New Vernon in Shriram EPC are also hurriedly playing catch up.

Now wait a minute! That’s how I too build my portfolio. How different are these guys? Why are they perched in a higher league? I managed minimum 165% returns over just one year but these guys wait for over 6-7 years to get a CAGR of 25% or even less. I don’t have a Wharton degree alright, but I beat these guys in their own game by many a wide mile. Isn’t that endorsement enough for my stock picking skills? I don’t follow analysts. I just look at managements, their track record, state of health of the business and a few key ratios like ROE, RONW, Debt:Equity and P/BV besides an occasional peep at price/volume charts. By keeping things simple yet systematic, the stocks that I pick end up as sure winners.

Perhaps the awareness that I could go wrong keeps me on the edge. A bit fearful at times that always makes me keep looking over the shoulders even after I invest. The feeling that I am up against informed investors that wield mighty clout never allows me to be smug. Over and above, it’s my own money and I need to be liquid always. These factors have put together a strong foundation for my portfolio architecture. The PE managers can afford to cover their conscience and be reckless. After all, it’s not their money at stake. They do get their management fee whether they win or lose. More than an occasional freebie from stock brokers that manage their portfolio as well. Why should they care? It’s their investors that pay a price.

Now I know why I could be a misfit in a PE environment. No regrets.

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