Perspectives

The shadow of Private Equity ownership on our buying decisions

The purpose of our letters and occasional blogs is to provide transparency in how we are thinking with the goal of creating stronger alignment with partners who want to think and act long-term.

Two companies in our portfolio – STAR Health Insurance and Restaurants Brands Asia – have existing Private Equity (PE) shareholders looking to exit.   Everstone is looking for a buyer for its stake in RBA.  Similarly, there are a few PE investors in STAR who are looking to sell their stake. 

PE funds have a finite life and need to return capital.  The shadow of these exits often results in a weakness in stock prices till the exit is complete.  For example, one of the PE investors in STAR sold a large stake via a block deal last Friday at a discount to the prevailing market price which resulted in a 8% drop in price.

Why have we continued to buy Star Health

Star Health has corrected significantly since our first purchase.

 
Enclosed is a note that explains why we have continued to buy Star at lower prices. 

Why do we never go down the risk curve in Financials to chase cheap valuations

Silicon Valley Bank in the US has collapsed.  SVB imploded as 3 risks collided

1. Side effects of excessive money printing came to the fore –> steep increase in the US yield curve as long term interest rates rose from 1.5% to >5% in about 15 months
2. Highly concentrated depositor base which withdrew large sums quickly
3. Huge Asset Liability mismatch –> short term deposits were parked in long term Assets (akin to what happened with our Real Estate NBFCs).  Hence, SKB was forced to sell long term assets and book losses when faced with withdrawals at the wrong time, which eroded its Capital base and created momentum for a run on deposits (vicious cycle).

An article that explained what happened is enclosed.

Investment thesis on Kama Holdings

We have put together a brief note to explain our thought process underlying this investment

Investment thesis on MAN Industries

Dear Partners,

We have put together a brief note to explain our thought process underlying this investment

Perspective on Life Insurance companies post-budget

Dear Partners,

We have put together a brief note that summarizes our thoughts and how we intend to act. 

Performance measurement – the difference between TWRR and XIRR

Performance reporting in the PMS industry had no standardized reporting till SEBI mandated managers to only report TWRR.  (Time Weighted Rate of Return).

TWRR measures skill of a fund manager – TWRR does not care about quantum of money invested, only the return earned over the time period money was invested.  It is calculated by multiplying returns over each time period money is invested and dividing it by the total time period. Alternatively, one can calculate this by assuming units are being issued at prevailing prices and calculating how the NAV of each units has evolved (MF method).

The stock market is not being irrational

In our last communication on 5 May, we had shared that we need to be realistic in return expectations as monetary policy is reversing which will have an impact on multiples.  We are seeing this play out as the market reprices risk.  There is a higher probability vs the last few months that inflation will stay elevated and that developed world Central Banks will need to raise rates aggressively and that could push their economies into recession.

Need for realism in return expectations

Conversations with partners over the past few days suggest some partners are not appreciating the change in monetary policy underway and what that means for future returns.

Hence, some points we have made earlier merit repetition.