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Kotak WM: Direct participation opportunities over blind pool funds

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Kotak Wealth Management’s head of products, Srikanth Subramanian, has told Asian Private Banker that clients have responded “extremely positively” to investments delivered by the firm following its shift in focus towards providing direct participation opportunities in unlisted domestic companies, including startups and unicorns.

Srikanth Subramanian, Kotak WM

“This was a call we made — and the jury is still out — but we think we are seeing strong early signs that it was the right move to stay away from blind pool funds and, by leveraging on our large in-house investment bank, to give investors the chance to participate directly in some of these transactions,” explained Subramanian, who singled out the private market as a bright spot in India for the past couple of years.

He specified that over a seven-month span, Kotak Wealth Management had delivered ten investment opportunities to its clients with each trading anywhere between a 2x and 5x multiple.

“Instead of getting clients stuck in a six, seven, even eight-year blind pool structure, we have opted to bring them opportunities in proprietary transactions — and what we have found is this kind of model is gaining traction,” he continued.

“It’s low-fee, high on fiduciary, high on due diligence, and investors like the fact that a large institution is finally providing them differentiated ideas that have high conviction both from a wealth management and investment banking perspective.”

By comparison, the fund route remains “unproven” in an Indian context, largely because returns have been underwhelming and the country’s tax and liquidity regimes load the asset class against investors, Subramanian added.

“So even if a PE or pre-IPO fund generates a return of 25-26%, after taxes and fees the net return comes to around 14-15%, which is very similar to public market returns without having to lock in money,” he explained.

Broad-based growth in demand for private equity in India comes at a time when the country is producing unicorns at an unprecedented rate.

In 2018, India added eight new unicorns, having produced nine in the preceding six years, according to a recent BDO India report. The country currently ranks fourth globally behind the US, China, and the UK, based on data from CB Insights.

Meanwhile, the steady increase in exits in recent years is further buoying domestic investors’ sentiment towards the asset class.

India saw 265 exits in 2018 at a combined value of US$33 billion. That total is anchored by Flipkart’s sale to Walmart for US$16 billion, although as a recent report by Bain & Company pointed out, even excluding that mammoth deal, 2018 will go down as one of the strongest years for exits in India in the last decade.

“It is certainly the case that when Indian investors see the proof in the pudding, see that exits are happening, and see that some of these companies are actually delivering returns that are commensurate to the risk investors would be taking on, this trend will continue,” said Subramanian, pointing to emerging opportunities in late-stage startup tech — a class he believes is “very potent” for wealthy Indian investors.

However, his enthusiasm does not yet extend to structured debt — even as a number of competitors continue to see success in the space in terms of raises.

“Rules and regulations governing private investors to participate in some of these sophisticated distressed debt opportunities in India remain complicated, so while we are looking to further explore the structured debt space, our focus has been on the equity side for two reasons: debt is more tax-unfriendly and debt takes more time,” Subramanian explained.

“That said, we believe that when people start to understand that some of these are high-risk, high-return transactions, the next level of differentiation we expect is on the structured debt side. But we believe right now, it is a nascent space.”

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