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We have consciously kept the hurdle rate at 12 per cent in our portfolio management scheme. This means that if the fund doesn't deliver Rs 164 for every Rs 100 invested in four years, the fund manager doesn't get to eat lunch!
What does Avendus Capital, originally an investment bank, have to offer high net worth clients by way of wealth management services? A high ‘hurdle' rate on investments, options to explore high-yielding debt and sound advice on fads such as real-estate funds says Mr Nikhil Kapadia, Chief Executive Officer of Wealth Management at the firm.
Excerpts from an interview:
Other global markets have outperformed Indian equities in the last six months or so. Should investors now invest more in stocks listed overseas?
I am a firm believer that, at all points in time, Indian equities are the best asset class to be in. If you have an economy growing at 8-9 per cent and corporate earnings growing at 15-18 per cent, you should be in that market for investing in equities for the long term.
Even recently, there are large cap stocks that have held up despite the market declining. Bharti Airtel, an index stock, has actually gained over the past year. In the midcap space too, for example, TTK Prestige has delivered a return of 3x and Camlin of almost 3x for investors in our discretionary portfolio management scheme. We divested and returned the full proceeds to our clients.
Globally too, you are now seeing a second round of concerns surrounding the Greece debt crisis, jobless growth in the US and a possible QE3. This is a concern for developed markets where forward multiples are in their mid-teens, while economic growth is anaemic.
Growth could slow down in India too due to rising interest rates…
There will still be opportunities in the (stock) market. If interest rates rise, there is no reason why debt-free companies or those which are efficient and manage a high return on equity should be impacted. Efficient companies will be able to manage cost increases by sourcing cheaper or pricing their products higher. The ability of companies to conduct their business with minimal debt will aid their equity value.
With interest rates rising, what opportunities does the debt market offer to High Net Worth Investors (HNIs)?
Today, most of the standard opportunities in debt — bank deposits and debt mutual funds — offer rates of between 7 and 10 per cent. However, if one wants to go further up the yield curve, to get returns in the range of 13-18 per cent, there are opportunities too. The question is, where do you look for those yields and how do you tap them while managing maturity and ring-fencing risk. What matters is the extent of value added by the wealth manager.
To cite an instance, Avendus recently placed 13.5 per cent paper with a tenor of six months in the microfinance space where the rating was P1, indicating high safety of return of principal and interest. We believe we have been the first to explore this domain for ultra high net worth families.
Debt investments in real estate always seem to offer higher yields. Do they offer ‘opportunities' too?
They do (laughs), but you should make sure you get your principal back! You have to ring-fence risk. If a developer comes forward to say that “I will offer you two-three times the loan value as collateral by way of property” and borrows at 21-22 per cent, you need to remember the risks to that. One is investing for a certain financial return and not to end up with a few thousand square feet of land!
If a firm is borrowing at 21-22 per cent, the underlying assumption is that it expects the value of the property to appreciate by at least that sum annually to break even. In a market like this, where we have a surfeit of commercial space, that appears quite risky. We have been looking at occupancy rates in the key metros and they aren't healthy enough to allow a developer to service a 21-22 per cent interest rate on his borrowings. Therefore, a rollover of the loan for another 12-18 months is likely.
Therefore, while talking of exploiting the yield curve, one also has to understand the risk involved and the extent of risk that compensates for the returns earned. We, in such situations, insist not only on cash flows of the borrower, including income-tax returns, but also on post-dated cheques, personal guarantee in addition to title deeds as collateral. We also define short tenors and evaluate the source of repayments. Clients would expect us to do this to safeguard their interests.
Related to this, private equity funds that invest in real estate projects have mushroomed and claim returns of 15-20 per cent. Do you recommend such funds to your clients?
We have deliberately stayed away from advising our clients to buy such funds for the simple reason that they have raised very large sums of money, thousands of crores, in fact, in the last four-five years. But they are yet to demonstrate performance. How many of these funds have delivered a return to investors?
If the funds are debt-oriented, one should be able to see cash flows coming back to the fund in the form of dividends/interest. Some funds do approach us with requests to do last-mile funding of projects and say that they make 24-25 per cent. But my question is, if the funds are confident of making 24-25 per cent a year, why don't they raise the hurdle rate they offer to investors? Why keep it in the 8-10 per cent range?
In fact, I should mention that at Avendus, we have consciously kept our hurdle rate (minimum return on which the manager does not earn a performance fee) at 12 per cent in our discretionary portfolio management scheme. If the fund doesn't deliver say Rs 164-165 for every Rs 100 invested in four years, the fund manager doesn't get to eat lunch!
In India, Ultra HNIs are getting smarter. They have been burnt in the past and are very demanding. Therefore, fee is likely to be paid for performance and not for returns of 8 per cent. We at Avendus Capital are seized of this and approaching the Indian market accordingly. It's a matter of time before others follow a similar approach.
The minimum portfolio sizes which wealth managers are willing to take on have come down in recent years, with some firms taking on even Rs 5 or Rs 10 lakh. What is your focus segment?
We have deliberately kept the ticket sizes quite high and would like to attract only ultra high net worth clients. The reason is, if I try to customise the portfolio and offer real value-addition to my clients, I cannot afford to do that for too many clients with small surpluses to invest. Managers who offer standard products will be able to take on lower ticket size clients.
I think at some point this deteriorates onto simple product pushing with room for practices such as mis-selling. At Avendus, we are focussed on the family office segment, which we see as a core competence. What we have tried to do is to offer specific solutions. If a client wants capital protection with participation in the upside of the equity market, we have a solution for that. If somebody is interested in ensuring that a family business is equitably bequeathed to his children, we can structure that too
