The Exchanges

Q What did you see in that model at the time as some of the successes and challenges in making venture capital work?

A I think in terms of successes, there were a lot of sectors and segments in India that were amenable to investment, to growth, to disruption, to more competition. So from the standpoint of being able to apply A toolkit of analytical skills and decide where there were conceptually compelling opportunities, it was excellent. Where it was difficult was in actually transacting. Anytime we approached an entrepreneur, they'd never seen a lot of the things on a term sheet, and that could be a really lengthy process, getting invested, sometimes for years, even after the idea had been formed. Exits were similarly difficult, and monitoring investments was hard. And some of these things have eased, and some of them have stayed very difficult. So, there are well-publicized cases, even today, where high caliber venture firms have had difficulty enforcing arbitration rights, or put options, or even audit rights. And it's one reason, notwithstanding the fact, that there's all sorts of growth in India That venture and private markets returns have been sort of underwhelming. Of every dollar invested since 2000, something like 35 cents has come back, and I'm sure the industry will come good, but as I was sort of looking over the proverbial wall at other asset classes, it's not exactly apples to apples comparison, but for example, in public markets, the dollar returns over that same period are sev…

AI assessment note: “in terms of successes... Where it was difficult was in actually transacting.”

Q What was John's story in building India Capital?

A John's background as an Indian investor was probably even less obvious than mine. He was born in Khartoum, Sudan, and then found his way to graduate studies at the London School of Economics, where he in turn talked his way onto the EuroBond trading desk at Drexel Burnham Lambert, which in the 19 eighties was about the headiest trading environment you can imagine. And he had a research role that he gave up to finish his graduate degree. And years later, he was a business journalist in Hong Kong in the early 19 nineties, watching this influx of capital into China. And he and a friend of his had a very simple insight, but in retrospect, a pretty powerful one, that that capital was at its core chasing scale And it was chasing growth in that China offered scale that almost no country could touch other than India. And that India too, in the wake of these major economic reforms that had begun to pivot it away from socialists and towards being more welcoming of foreign participation in foreign capital might be able to deliver growth also. With that observation, he decided to launch a fund and spend A couple years passing the hat until he was able to do so and launched in 1994 with all of fourteen million dollars, at which point the market promptly crashed. But John was able to endure and persist and actually strengthen his relationship with limited partners. He found his way to a rese…

AI assessment note: “With that observation, he decided to launch a fund and spend A couple years”

Q Before we dive into how you do that, I'd love to talk about today the case for India, say for public market investing. What is that high level case when people think about where they're allocating capital?

A I think in terms of the public markets, it is a really broad canvas to invest in, and that makes it particularly attractive. There are more than 5000 publicly traded companies. Of which, depending on how you cut it, anywhere from 700 to upwards of 1500 are investable at institutional scale. And it's unusual for an emerging market in that it's not dominated by any one commodity or sector. It's among the most fragmented markets in the world in terms of all the different themes and industries that are represented, and it is among the most liquid for an emerging market. It's also one that is not particularly well covered by research. So you have this situation where there are all these different avenues in which to invest in two thirds or three quarters of companies have one or zero sell side analysts covering them. There's all sorts of dispersion in terms of the kind of earnings and fundamental performance companies produce. Across industries like you'd expect, but even within sectors in share price performance, same situation. Partly as a consequence of that, there isn't a usually wide divergence between what consensus thinks is going to happen to a company in what they actually deliver.

AI assessment note: “it is a really broad canvas to invest in, and that makes it particularly attractive.”

Q story of the potential ability for active management to add value because of the differential opinions and lack of research goes alongside a beta case. And if you go back, not too long, I guess, there were bricks. At one point in time, people talked about Chindia, the importance of China and India. What is the case for India for its long-term, call it beta opportunity, particularly compared to China?

A Yeah, I think that is the comparison people are making now, and maybe making in a slightly different way than they were five or 10 or 15 years ago, where I think it was just universally understood that China was the emerging market star, and maybe India had a role to play somewhere in its orbit. And I think coming from India, China demands and deserves a degree of admiration for what they've achieved. They have delivered wealth in industrial build out at a scale that India has not yet begun to touch. Having said that, there does seem to be this distinction where notwithstanding China's superior growth over the last couple of decades, India, it's translated far better into investor and shareholder returns. So if since 1999 when I started my career, China's GDP growth has been 16 X versus eight X for India, but China's index performance on that 16 X GDP growth has been two and a half X, and India's index performance on that eight X GDP growth has also been eight X. And without knowing China really well, I don't know all the reasons to explain that, but when I think about these stories of these lean capital efficient Indian companies, that may go some way to providing an explanation. Where Indian households are less leverage, Indian companies are a lot less leverage. Private sector debt to GDP in India is like, 53%. I think in China it's a 195%. So that free flow of discounted, ma…

AI assessment note: “India, it's translated far better into investor and shareholder returns.”

Q What is an example of what that deep dive research looks like?

A Sometimes it can be research on a discrete issue. So, for example, there can be a company with a piece of land on the balance sheet where it's only been required to record at cost, and it could have been acquired 80 years ago, and they don't have to tell you where it is, and it's a matter of sifting through land records, figuring out where the contiguous parcels are, peering over the fence wall, seeing what's there, valuing it, that, that type of thing, which is just kind of hard for Other types of investors to do. Usually, it's something more integral to the earnings trajectory of a company. So, for instance, we decided that there was something interesting about a natural gas pipeline that had monopoly position distributing gas to a rapidly industrializing region, and it was being priced like a stranded asset because the cost of natural gas Had come up in the world of valuing a pipeline, you know, the capital investment, you know, the operating costs, the pricing's fixed. It's all about how much volume you can get through there. So the notion was really interesting area, but maybe there won't be anyone buying this natural gas because it's too expensive vis-a-vis power in the grid. And that was a reasonable rough and ready assumption to make for the sell side analysts covering this company, which was A billion dollars in market cap. And the same analyst was also covering 29 oth…

AI assessment note: “Sometimes it can be research on a discrete issue. So, for example”

Q Wow. So that part of what you were doing, it sounds like, was maybe easier than you would have thought to be able to go and sell to these companies. What were some of the challenging aspects of doing business in India back then?

A Everything. Especially coming out of the very comfortable Climbs of a consulting environment where it's organized so that you have as few distractions as possible. And at that stage, my office in Boston, I think we had Class A space above Copley Place Mall, and our fellow tenants were Gucci and Louis Vuitton. And then I show up in India, and my office is in a converted supply closet that I shared with my boss's secretary and our server and our fax. There was a chair and a cardboard box, and one of us got the chair, and one of us got the cardboard box, and day one, jet lagged out of my mind, the phone is ringing off the hook, and it's all calls from creditors wondering when we're gonna pay their bills. It's like, what have I gotten myself into? And some of that was just the difference between a very well-resourced organization in the U.S. and a thinly-resourced startup, which you would see anywhere, But some of it was really India-specific, so it turned out we had all these creditors not because the company was mismanaged, but because the venture capital investment that we were expecting any day from overseas, the government body called the Foreign Investment Promotion Board that was responsible for reviewing and approving this investment determined that all the paperwork was in order, everything was fine, but they just didn't like the name of our company. It was called India Li…

AI assessment note: “some of it was really India-specific... the government body called the Foreign Investment Promotion Board”

Q You have this underlying growth story, even if you're talking about a cement company, maybe that's tied to real estate that's growing. How do you think about the different high level lenses of growth versus value quality versus the cheap asset in what your sweet spot has become?

A I think your point is well taken, that there are growth businesses like cement, like power, like real estate, that from a US context, we say, oh, they're pretty mature sectors. In India, they're not mature at all. So that's one thing that I think you have to take into account in India, that where growth is may not be entirely where you expect it to be. In terms of sort of thinking about growth versus valuation, We are now, and this is typically the case, a few turns cheaper than the index. We do have a valuation filter in what we're looking for. Having said that, if you are, I think, creative about where you look for it, sometimes it's not as much of a trade-off as you might expect. So by way of example, one of the fastest growing in By some distance, the highest return on equity participant in the power sector is trading at eight times earnings. You can pay a whole lot more, because if you say, okay, India's got all this power investment company, and now the whole country's connected to the grid, which it wasn't before, and people can afford to pay electricity. What I need is power generation, and you can buy it. There are any number of companies that have IPO'd, and those roadshows have been standing room only, And the listings are a dozen or a hundred times oversubscribed, but if you have the time and appetite, you can look all sorts of other places in that ecosystem. There …

AI assessment note: “In terms of sort of thinking about growth versus valuation, We are now”

Q So tell me how does someone get from the Midwest of the United States to a path to spending your career investing in India?

A In my case, almost entirely by happenstance, and good luck. I grew up in Minnesota, which in the 19 eighties was even more homogeneous than it is today, and I don't even think we had an Indian restaurant in my town that I can recall until well into my teenage years. We were just beginning to experience what would become waves of Immigration of people coming in from Vietnam and Laos and Cambodia, so it happened by the time I was in high school and I was in an urban public school where a lot of my classmates were from somewhere else, and that probably planted a bit of a seed that there might be something out there beyond Minnesota's borders or America's borders, but it was one that was dormant for a while. I studied at Brown, And afterwards, I ended up in Boston at Bain & Company. I think like a lot of people with energy, but without a clear sense of direction, management consulting seemed like the default bet. And I did that, and I liked it, and I enjoyed the intellectual challenge and the analytical toolkit we got. And most of all, I loved that my colleagues were energetic, and they were curious, and they were thoughtful. And as it happened, they too were from all over the world, including and especially India. So when the time came that I was thinking, okay, what do I do next? And can it be something a little different and maybe a little more hands-on than management consultin…

AI assessment note: “In my case, almost entirely by happenstance, and good luck. I grew up in Minnesota”

Q What did you find about the culture and the types of entrepreneurs in India?

A Culture for entrepreneurship, I think, was outstanding. That there were some enormous Challenges that people dealt with. That it was difficult to get office space. It was difficult to take months, historically even years, to get a phone line. So much so that there's a Harvard Business School professor I worked with named Tarun Khanna, who'd done this seminal research where he said, conglomerates are the worst form of business unit and organization and suboptimal everywhere in the world, except India. In India, they actually make a lot of sense because it's just so hard to start a company. And notwithstanding that, you saw a real culture of entrepreneurship. I think the reputation is that sometimes entrepreneurs played a little fast and loose, and that's probably true anywhere in the world. In the time I was there, there were people who tried to hijack bank accounts of companies we were invested in. There was someone who very nearly got an investment on the strength of his outstanding Resume as an MIT professor, and it turned out to be, he was showing us the resume of a different person with the exact same name. People would try anything, and you had to be a little ready for that, but I think underneath it all, whether small companies or big, you saw them developing this grit, inability to persevere against any manner of resistance, especially poor availability. Of capital. So w…

AI assessment note: “Culture for entrepreneurship, I think, was outstanding. That there were some enormous Challenges”

Q So with that backdrop of growth and really strong potential for growth in the country, the translation of stock performance, and then the opportunity to add value, you mentioned that John and you had kindred spirits in how you thought about investing. So what is that philosophy of how to go about approaching the market?

A I think in a nutshell is that research matters. I have a journalist friend who's fond of saying that India is a vast orchard of low hanging fruit. In a sense, that's true, that you can identify easily a dozen sectors where it's small, it's going to grow. This is all going to go to the moon. But on the other hand, this observation that in many cases, it's not the largest, the highest profile, the indexed constituent Representative of a particular theme that's actually gonna do best from a shareholder or return on equity standpoint, and it's that appetite to roll up our sleeves and try and understand if there's a different or more interesting way to participate in it. That has been key to John's success in building the firm. John, early on, distinguished himself and saying, I'm actually Do the work. I'm going to read the constitutive documents of these companies. I'm going to read shareholder letters from 10 years ago and try and understand what the business model of these stocks actually are. And then I came to this with some consulting experience and with a venture toolkit that was really heavy on that kind of fundamental analysis as well. And that's turned out to be I'm persistently a differentiator in the Indian context.

AI assessment note: “I think in a nutshell is that research matters.”

Q What are some of the hidden potential snags today that are the equivalent of losing your physical certificates back in the day?

A They have to do with expectations, especially of foreign portfolio investors, of which there are now a few more, that are sometimes interpreted as letter of the law that isn't actually going to be enforced in spirit, that these requirements that you can't actually raise capital from India if you're a foreign portfolio investor, the expectation that you can't actually sit in India and make your investment decisions, The regulators will sit quiet on these things for a long time, and then every few years they'll take an interest. And you have these situations where good investors suddenly have to have an asterisk in their NAV because they say we have an unquantifiable contingent liability because of this issue. And I think most of those get resolved in a reasonable way, that they sort of wind their way through appeals, and eventually at a senior level, There is an enlightened policymaker says, you know, this is fine, but that can take years.

AI assessment note: “They have to do with expectations, especially of foreign portfolio investors”

Q You look at the US and the S&P 500 dominated by the mag seven, which has certain implications of what that means for the valuation of the S&P 500. What is the composition of the most popular indexes in India relative to the types of companies that dominate it in the concentration?

A Fortunately, it's pretty representative. So you don't have a situation where one company has an absolutely outlier share of it or one index. So you have within the index consumer staples and automotive and banks and technology. It's pretty eclectic. Having said that with 5000 stocks, there's gonna be something that's not captured in the performance may be very different from the rest of the market. Sometimes that's meant That much like the US, there have been periods, usually where the tide is going out in terms of enthusiasm for India, where there will be a handful of companies that account for all of the index performance, and that can make life difficult as an active fundamental investor, much like it has in the US. Sometimes it runs the other way. So right now in India, most of the market is Valued very much in line with historical averages, certainly for the large cap index. Very small companies are actually unusually expensive right now, where there are small cap indexes trading at a three or four or five turn premium to the larger cap index. Even as the market has grown and there are more participants, there are, as I see it, enduring pockets of really striking pricing inefficiency in both directions.

AI assessment note: “Fortunately, it's pretty representative. So you don't have a situation where one company has an absolutely outlier share”

Q As you look at the business and the niche that you've occupied, talking to investors, where are you hoping to take it over the next few years?

A In large measure, continuing to do what we've done. It's a hard business, but it is a pleasure that we are able to focus on being participants in good companies for a long period of time, and that is a little bit because of the process we've built, and a lot because of the type of investors we've been lucky to have, and I wouldn't want to radically change either of those things. But it's also really neat to be able to ride along with India's growth. And just by continuing to do what we always have, that is a scaling opportunity. And when I think about what is the what you have to believe about India, it's growing today at six, seven, seven and a half percent. It's a larger economy now than Japan, but GDP per capita is still on par with Congo and Ivory Coast. So for that level of growth to continue, the ask in some ways is not to go to the moon, and we all have the GDP of per capita of Liechtenstein. It's over two and a half decades to hit the level of Peru and Ecuador and Botswana. And that's something a lot of countries have done over the last half century, and I think probably India can do too. And fortunately, in the Indian context, businesses have managed to translate that pretty efficiently to earnings and share prices. 90% of the time, we're just trying to earn an economic return for our investors, but every so often, it's fun to think of that process of being along for t…

AI assessment note: “In large measure, continuing to do what we've done.”

Q doing everything you can with communication and more communication. You're still closer to the assets than your investors. So you can see what's happening in the businesses and get some confidence that it's just a price move in the markets if the businesses continue to be strong. What have you seen in other periods of the impact of volatility in your performance at times on fund flows in your business?

A So what one always hopes for is when things are beat down the most, that's when people will be most eager to invest in. That's unfortunately very difficult to actualize. So that process of saying markets down, NAV is down, companies are doing great. We've had some success and some not of getting follow on commitments. I think what has worked well is it's resulted in pretty sticky capital. So we haven't seen the kind of outflows where people are having a knee-jerk reaction to distress. In terms of what leads people to invest, I think, I think it's changed a little over time that India for so long was a really boutique specialized market where it was one or two percent of all country world index. So when I first joined, I had exactly the wrong idea. I thought, oh, it's a small specialized market. We'll get Small investors, and it turned out to be exactly the opposite. It was only the really big ones with a lot of team strength and bandwidth and appetite and the ability to stick their necks out there who were really looking at that esoteric process. When the fund was first launched, going back all the way in our history, it was launched with all of fourteen million dollars, because after passing around the hat for two years, that's all the money we could find. And half of that was from Soros in the public domain, and it was really only people like that that were willing to take on…

AI assessment note: “we haven't seen the kind of outflows where people are having a knee-jerk reaction”