Where Do Millionaires Invest? Avendus Wealth Management On Navigating Private Markets

Nitin Singh: We are telling our clients very simply that rather than looking at conventional asset classes, it is very important to look at your portfolio, in terms of three pieces.

The first piece of the portfolio–the safety net–which is a portfolio which will, even if the world comes to an end, be protected, will give you income, will give you yield, will give you whatever. And depending upon your risk appetite, depending upon your need for liquidity, that will vary between you and me. Typically, that portfolio will never beat inflation because it’s ‘fill it, shut it, forget it, be safe completely’.

The second part, and that typically ranges anywhere between 5-20% of client portfolios depending on the liquidity needs, is typically the market-linked portfolio.

The market-linked portfolio varies across fixed income, REITs, InvITs, mutual funds, public equity, large cap, mid cap, small cap. But that’s where all of us are spending the bulk of our time to say that if the market delivers 6-8-10% return, how do I ensure that I am getting a 2-3% alpha–which is why you tend to work with managers, you tend to identify stocks,… and that’s where everyone’s energy goes.

The third part of the portfolio is the strategic portfolio, which is a little bit more illiquid (in) nature, which is typically supposed to provide you that 15-18-20-25-30% alpha, which for entrepreneurs includes stakes of their own company’s strategic investments, private equity, venture capital, venture debt, real estate.

What we are telling our clients is that a first thought over what allocation between these three buckets should be.

Typically, what we end up telling people is that a third bucket should be anywhere between 20-30% of your portfolio if you are, let’s say, a moderate to aggressive client.

The second thing is that the one thing that is shaping India today is the digital revolution. We firmly believe that over the next 10 years, the kind of value creation that’s going to happen in India.

To give you a sense of the last 10 years, you saw value creation of roughly $1.5 trillion happened across private and public markets.

Before that, the number was similar, maybe a little lower. Our thesis and our premise is that in the next 10 years, you will see that being tripled on the back of what’s happening structurally, which essentially means that you need to have presence across these two spaces. A large amount of that is what will lead to digital companies. Now, whether it’s private or public doesn’t matter because a lot of these companies will go through the cycle and will become public at a point of time.

But, as a UHNI, as a millionaire if you want to future-proof your portfolio–and I use this word a lot because entrepreneurs understand future-proofing their businesses–they need to understand how to future-proof their portfolios as well.

For future-proofing your portfolio, you need to have at least 20% allocation to such businesses over a period of time. If you are at zero today, it will take you 3-4 years to build up but you must. That is what will drive the next level of growth.

The second piece that you tell your clients is that perfect markets–markets are becoming more and more perfect if you look at public equities, if you look at traded fixed income. Overall, perfect markets provide you only so much opportunity to make alpha.

But you need to be exposed to that, you need to have a 60-70% exposure to that, but it’s really imperfect markets and imperfect opportunities that will provide you the opportunity to make alpha. But you need to have a blend between them.

The third piece is we are bullish on large cap today, we are saying be within your equity portfolio, be exposed to 60-70% large caps. We believe that this is high quality, fixed income. There is a great opportunity today to fill up your portfolio with good AAA tax-free because you have not seen these yields, if you want to lock it and hold it.

We are bullish on venture debt, an interesting category, because if you are saying that there is pain on the venture capital side of it and if fundraising cycles are going to get elongated, therefore, the cost of raising venture capital is much higher than the cost of raising venture debt and good quality companies can get in.

So, we still continue to be bullish on good quality digital venture capital and consumer venture capital themes.

What has happened for pricing perspective in the market is that you basically have been set back by a year, basically seen 20-25% decline in pricing across the market.

But today, we have raised Rs 8,000 crore as risk capital. Of that, only Rs 2,000-2,500 crore have got deployed. The rest Rs 5,500 crore is still sitting as dry powder to be called upon.

When I talk to fund managers, they are telling me two things. One is that there is greater sanity. They have pricing power. They are looking at higher quality companies. There is more and more focus on companies, on operational excellence and lasting the life cycle.

There will be consolidation over the course of the next one year because a lot of the companies will end up consolidating into market leaders. So, to be somebody starting with cash or coming into the market today, it’s a great time. Have you lost about a year of return? That’s fine, but for a 10-year fund, it doesn’t matter.

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