Indian Entrepreneur Fund A 5 Star Rated Fund by Morningstar Advised by
Contents Indian Entrepreneur Fund: The Strategy Philosophy Value Creating Traits The Study: Indian Entrepreneur Businesses About ASK Investment Managers Fund Features Biography Advised by 2
Indian Entrepreneur Fund The Strategy A 5 Star Rated Fund by Morningstar • Invests into Indian entrepreneurial businesses of size, superior quality and high growth at fair valuations • IEF follows a very rigorous, disciplined, strong filters-based investment approach, while embracing value-creating traits (more about it later) • Invests into quality entrepreneurs with • Vision and dynamism • High standards of governance • Wisdom • Demonstrated capital allocation and capital distribution skills • Superior quality achieves the preservation of value and high growth is sought to achieve expansion of value Advised by • Promoter with adequate skin in the game ensures alignment of management and shareholder interests Note: Promoter / Family stake of at least 26% is desired in portfolio companies, except in rare and fit cases. 3
Why Entrepreneurial/Family Businesses? We believe Entrepreneurial / Family Businesses have Passion, Conviction and Commitment • Longer term view • Own skin in the game – Alignment of interest • Ability to spot opportunities early • Dynamic leadership • High score on innovation and intellectual capital • Advised by 4
Key Investment Objectives 1) Capital Preservation 2) Capital Appreciation over a period of time Advised by 5
Overarching Investment Philosophy and Principles • Greater certainty of earnings Vs mere quantum of earnings growth • Superior and consistent quality of earnings Vs mere quantum of earnings growth • High quality at a reasonable price Vs inferior quality at arithmetically “cheap” price. Advised by 6
Investment Approach • Price the value rather than valuing the price • Buy “growth” businesses at “value” prices • Disciplined investing into outstanding businesses • Seek compounding opportunities Advised by 7
Value Creating Traits that we seek in our investments… • Material Size of Opportunity • Superior Management Quality • Strong Earnings Growth – A Compounding Machine • Superior Quality of Business • Favorable Value Advised by 8
Value Creating Traits Size of Opportunity • Size of Opportunity is a foundation for Continual Growth (of profits) and creating a Compounding Machine: Foundation on which large Value Creation rests • It is Less about “How Large a Business is” and more about “what it Can Be” . Debate is really about Future Size rather than the Present One. • Size of pond Vs. size of fish: It is more about size of pond rather than size of fish. Even a small capable fish can grow big if it is in a big pond and if the pond conditions are right. • The debate between Large-Cap and Mid-Cap is largely an artificial one Advised by 9
Value Creating Traits Management Quality • Two vital tests for Management: Capital Allocation and Capital Distribution • Conglomerate Complexity leads to less Value Creation • Corporate Governance is not a Jargonistic Buzz-Word. Honest Mistakes, even if significant, are punished less by the markets compared to relatively less significant but Deliberate Violations of the Value System. • Capital Allocation has a deep Impact on the Investment Returns • Good Businesses typically seems to attract Good Management and Vice versa • Management Quality has far higher impact on returns than investors care to imagine Advised by 10
Value Creating Traits Earnings Growth • Price is nothing but a slave of earnings and its relentless growth over a period of time • When Growth goes away, Equities reduce to a Bond • Growth has a Way of covering Valuation Mistakes and fighting with Prolonged Period of Market Machinations • (Capital) Dilutive Growth results in lower Relative Value Compounding compared to Non-Dilutive Growth. • Qualitatively growth has to be secular, predictable, less volatile and business having character simple enough to understand, even for a lay person Advised by 11
Value Creating Traits Quality of Business • Two vital tests for Quality are Capital Intensity and Capital Efficiency • Persistent and Superior Capital Efficiency is the single most important evidence of Quality • Earnings Growth is necessary but not a sufficient condition for Value Creation • Growth and Quality of Growth are not co-incidental for creating value but they actually cohabit to do so • Root to Preservation of Wealth solely resides in Quality i.e. Quality of Business and Quality of Management … .. • Even with significant but Temporary Earnings Destruction, a High-Quality Business will manage to shrug-off the blues Advised by 12
Value Creating Traits Value • Price is Servant, Value is Master: Our investing is about Pricing the Value, rather than Valuing the Price • Price – value gap: Margin of safety (or Implied Returns) • Cash Flow is the only enduring reality: Accounting Profits and PE Multiples are Popular, but Unreal, Pastimes • Quality of Business Vs Valuation: Superior Business at a Reasonable Price is Wealth Creating rather than Inferior Business at a Mathematically Cheap Price Advised by 13
Key Investment Attributes Size of the Opportunity Quality of Business • • High quality of business (Superior RoCE) Size of pond Vs. size of fish • • Strong moat. Impregnability. Dominance • • Sustainability Resilience • • Key pivot of strong wealth creation Liquidity Four key investment attributes Earnings Growth Value • • Favorable Price-Value Gap Quantum • • Margin of Safety Consistency • Durability • Predating (Early Vs Later) • Compounding power Advised by In addition to the above, good management quality is a given constant 14
Imperatives of Equity Investing Equity investing comes as a package! Returns • Quantum • Qualitative Consistency Permanence Degree of Certainty Volatility • Inherent in the character of equity investing • Diminishes with time Time Period • Time is more important than timing • Proper calibration needed • Risk inversely correlated to time across all aspects • Quantum of returns being Real Risk just one of them • Margin of Safety / Risk of permanent loss of capital Paying excess price over value Advised by Buying inferior quality • Investor psychology towards investing 15
Rigorous Filters Based Approach Value Creating Traits Parameters Tangible Rule Value Creating Traits are converted into Rules as below Parameter Trait Tangible Rule Top 500 businesses as per Market Size of Opportunity Top 500 businesses Capitalization Minimum PBT of INR 100 cr. (Trailing Scale and Resilience Bottom-line 12 months or current fiscal) Management Quality Integrity, Vision, Execution, Capital Allocation and Capital Distribution skills Minimum 20 to 25% earnings growth Earnings growth without capital Earnings Growth over the next 3 to 5 years without dilution capital dilution Strong Capital Efficiency Quality of Business Minimum ROCE of 25% (Demonstrated or Imminent) Value Margin of Safety Price Value Gap of 20% or better Advised by 16
Portfolio Research Methodology and Filteration 500 Top 500 as per market capitalization Only companies > 25% promoter / family holding (except in very rare and fit cases) 306 Universe of Entrepreneur and/or Family Owned Business = 306 cos Condition of minimum PBT of INR 100 cr (USD 16 mn) 210 Subjective evaluation on management quality, their integrity, vision, past track record, 123 execution, capital allocations and distribution skills, corporate governance standards etc. 59 Quality of Business (Capital Efficiency) – Minimum ROCE of 25% Two more filters for selection of stocks a) Minimum 20 to 25% earnings growth over the next 3 Advised by to 5 years without capital dilution and b) Price-Value gap (margin of safety) of 20% 20 Indian Entrepreneur Fund 17
The Study Indian Entrepreneurial Businesses Advised by 18
Indian Entrepreneur Fund The Study and the Origins We analyzed the top 500 companies over a period of ten years (from 1999 to 2009) on four principal parameters • Top-line • Profitability (Operating Profit, Profit Before Tax, Profit After Tax) • Capital Efficiency (Return on Capital Employed, Return on Equity) • Actual Investment Value delivered (net of any capital dilution) Four ownership buckets were examined • Entrepreneur led firms • Public Sector Undertakings • Multi-national Corporations • Pure Professional Firms Advised by 19
The Study Empirical Findings on Family Owned Businesses (FOBs) Continued Dominance Fastest growing businesses Superior operating performance Strong capital efficiency Biggest wealth creators On most parameters entrepreneurial firms had done far better than the other forms of ownership and Indian Entrepreneur Fund was launched in March 2010 following our study Advised by 20
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