Why veteran investor Bharat Shah isn’t investing in new-tech

Besides diluted promoter involvement, lack of ‘real’ profit and management solidity has deterred him from investing in new age companies, says Bharat Shah

Lack of promoter ‘skin in the game’ in new age companies does not inspire confidence to invest in new age companies, said veteran investor and executive director of ASK Investment Managers, Bharat Shah in an exclusive interview with Moneycontrol. Besides, he said, the lack of ‘real’ profit, and management solidity has deterred him from investing in this space.

He also said, private markets have been unduly benevolent, and while public markets have their own idiosyncrasies, their norms for value creation are fairly well-defined and the onus is thus on new listers to demonstrate their worth in public markets.

When asked about the investment opportunity posed by new age tech companies, he said he looks for the same filters in them as for any other business – whether you have a large size of opportunity, whether you have scale, whether you can build a profitable business, whether you can build a predictable and durable business…

“Ultimately, these are the levers of value creation.” he said. “A large size of opportunity, and capability will give you a potential right to keep growing at a meaningful pace, in a compounding way, not merely in an episodic way.”

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Shah emphasised that when the character of the business is right and it is managed efficiently, the quality of growth rate will be superior, and not wither away with the external challenges easily.

Quality lends longevity and durability to a business, which has a very important bearing on value creation. While these factors improve the value of a business in the present, predictability, other things being equal, reduces the perceived risk. This will translate into lower discount rate while ascertaining the value of a business, which improves its value (or fair price).

Shah said many of these qualities for value creation are not present in new age companies yet.

“While some of them may have built scale, they are yet not profitable,” he said. “They try to define profits, in a very creative way, some adjustments done… in some futuristic time frame… So we like to see whether there is a real profit. Because profits are profits. There are no multiple definitions of profits. Simple definition of profit is the real cash flow. If you are generating a real cash flow period after period, then you know that you are building something.”

Besides, Shah said these companies do not satisfy his second criteria which is quality and durability of management. “Many of these businesses still have to demonstrate their management solidity. They are yet to prove that. Many of them don’t have meaningful skin in the game. Unless you have meaningful skin in the game, your decision-making may suffer.”

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New age tech companies, mostly venture capital funded, tend to have low promoter holdings as founders get diluted significantly during the course of building the business with high doses of venture funding.

Shah however said he would like to be “engaged” in evaluating the opportunity and improving his understanding of the businesses. “A good starting point (for investing) will be when they start showing real profits,” he said. “I remain an observer till then.”

Shah said when companies enter public markets, the onus is on companies and their managements to prove their worth in the stock markets. They cannot expect to automatically have the trust and confidence of the investors. Besides, there is a material difference in the mind-set of private and public markets.

“Private markets are far more generous when times are good, or what they believe to be good times.” he said. “Accountability for capital in terms of core tenets of value creation, private capital tends to be unduly generous.”

Although the definition of what is value creation itself is a highly debatable notion, when private companies come to the public market, they are exposed to all kinds of questions and legitimately so.

“Not that public markets are free from their own idiosyncrasies, and misbehaviour at times, but over a period of time public markets have become a highly, clinically, sanitised place. And they reflect the reality quite admirably over a period of time. They have their norms. And those norms are tough. Those are not very short-term, very generous private capital kind of norms.” Shah said.

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For the record, Shah was one of the earliest fund managers to identify the opportunity in Indian IT and load up on tech stocks ahead of the dotcom boom in 2000.

ASK Investment Managers is one of the leading PMS/AIFs in the country. Its flagship offering ASK Growth portfolio launched in January 2001 has delivered an 18.7 percent CAGR compared with a BSE Total Return of 15 percent since inception.