ETMarkets Smart Talk: 40% of the family offices in India have approximately doubled their investments in private markets: Sumegh Bhatia

ETMarkets Smart Talk: 40% of the family offices in India have approximately doubled their investments in private markets: Sumegh Bhatia

“40% of the family offices in India have approximately doubled their investments in private markets over the last 5-6 years,” says Sumegh Bhatia, CEO & Managing Director, Lighthouse Canton India.

In an interview with ETMarkets, Bhatia said: “The mid/small cap space does seem attractive currently, with the respective indices trading fairly below their 5-year average PE.” Edited excerpts:

The Indian market is steadily inching to record highs. How are FIIs looking at India? Are they late for the party on D-St?
The foreign Portfolio Investors (FPIs), who were net sellers of Indian equities in the first three months of the calendar year 2023, have come back in a big way recently, having pumped north of INR 30,000 crore into Indian equities in the month of May itself.

The reasons for this bullishness are India’s stable macroeconomic environment, reasonable valuations of stocks, and a resilient performance on the earnings front by most industries in Q1-CY-2023. As far as being late to the party is concerned, we do not think that is the case.

The 12-month forward PE for the Nifty is currently below its 10-year average (based on May 25 data), which points to valuations being reasonable.

However, we do remain cautious in our deployment strategy and currently advocate a staggered approach of investing in equities over the next 3-6 months.

That being said, the mid/small cap space does seem attractive currently, with the respective indices trading fairly below their 5-year average PE.

How is the wealth management space shaping up in India, say post COVID? Have you seen any changes in the way Indian HNIs are investing?
Post Covid-19, UHNIs and single-family offices are now more open to an ‘agile’ approach to their equity investments, rather than a pure ‘buy-and-hold’ strategy. Covid-19 has ushered in unprecedented volatility in the global markets.

UHNIs are increasingly becoming more aware of the importance of economic cycles and are incrementally carving out tactical allocations in their overall portfolios.As a result, uncorrelated and risk-mitigant market-neutral strategies are gaining rapid prominence.

COVID-19 also saw a huge push towards digitalization, and as a result, there has been an increased investor focus toward new-age companies in sectors such as fintech, prop-tech, and consumer tech.

Another aspect that has gained rapid importance is that of estate and legacy planning. This is no more a “should be done” or hygiene concept anymore.

We all have seen how the pandemic unfolded and the deep sense of fragility it brought around. Larger discussions are taking place around execution and putting together robust architecture which is indeed encouraging.

What about investing in global markets? Has that picked up recently – what is your data suggesting?
LRS remittances for investment in equity/debt have been on an uptrend for the last four financial years. It has increased progressively from $431mn in FY2020 to almost $1.3bn in FY2023 as per the RBI data.

This reflects an increasing appetite among Indian investors to access foreign markets and take advantage of attractive valuations and yield opportunities globally.

Overall remittance trends around investments have been on an up-move irrespective of macro-related complexities, growth slowdown, and poor investing sentiments.

The emergence of investment platforms facilitating global investments has only added to the tally and overall client experience.

Indians are increasingly aiming to diversify their portfolios and create a rupee hedge.

The volatile macroeconomic environment is also presenting good investment opportunities globally owing to dispersion in sectoral performances.

For example, a lot of money was invested in the US tech sector at the start of this year via ETFs/Feeder Funds, due to the steep valuation corrections witnessed in CY2022.

In terms of asset class – which is most favoured (overweight) by the UHNI clients?
Equities (listed plus unlisted) remains the most favored (overweight) asset class for UHNIs and single-family offices. According to a joint survey conducted by Ernst and Young and LetsVenture, allocations to startups/VC funds comprise ~18% of the overall pie. There is an approximate 36% allocation to listed equities and 20% deployment in fixed income.

Private market investments seem to be the preferred alternative investment for UHNIs and single-family offices. Per the above-mentioned survey, 40% of the family offices in India have approximately doubled their investments in private markets over the last 5-6 years.

This has been helped by the fact that the private markets have matured and there have been some sizeable exits. Such exits provide visibility and have convinced family offices to consider private market investing as a viable medium-to-long-term wealth creation opportunity.

Mainstreaming of performing and private credit was already underway and recent changes in debt taxation have brought them at par with other fixed-income alternatives. UHNIs and family offices have lapped up the quality propositions around private and performing credit to enhance overall yields in the portfolio albeit with well-managed risk.

Which sectors are looking promising or are likely to remain in the limelight for the 2H2023? We have already seen record highs in FMCG and Nifty Bank sectors.
We feel that sectors that directly benefit from domestic growth led by government spending and policies could be considered investment opportunities.

Financials remain attractive as we might be on the cusp of a fairly solid credit cycle over the next couple of years. Bank balance sheets have never looked better and their NPA problems seem to be behind them.

We are also bullish on sectors that are likely to experience margin expansion owing to the falling commodity prices worldwide.

What about the recent levy of 20% TCS on foreign remittances? Will that also hamper your business or international investing in any way?
We believe this rule change makes direct investments in foreign markets quite unattractive and unviable for retail investors.

For retail investors, this would mean a large upfront cash outlay. This change also adversely impacts trading platforms aimed at such investors.

However, for the client segment in which we operate in, which is the UHNI and single-family office segment, it is not expected to have a meaningful impact.

For smaller investors, the indirect route of accessing global markets (via international mutual funds and ETFs) will become more attractive, since these are exempt from LRS. Hence AMCs that offer such products can expect more retail AUM inflow.

Apart from India which other global markets are looking attractive from an FII/UHNI perspective?
The outlook for developed markets, the US, Eurozone, and the UK, is uncertain in our view with elevated recessionary risks following an accelerated monetary tightening cycle.

In the context of major global markets, we continue to see China and India as attractive investment opportunities.

While China’s growth opportunity has weakened and belied the expectations of a rapid recovery anticipated earlier, it continues to witness strong domestic growth opportunities, despite an uneven recovery so far.

India is both cyclically and structurally well-positioned amongst major economies. MENA is also a growth region that continues to benefit from benign inflation and growth-oriented policymaking.

We should however note that our confidence in both China and India is much for outperformance rather than absolute performance, should our bearish view on developed markets play out.

What about IPOs and new-age companies – how are you looking at that space? Have you recently invested in some of the platform-based companies?
We think that private market investing has come of age, where the broader risk-reward spectrum ranges from seed stage investing to last mile growth stage funding – just before IPO (Pre IPO opportunities).

Investor interest in private markets is rising owing to the fact that a significant amount of paper wealth is being created amongst early/mid-stage companies.

There is a realization now that the majority of the valuations are now first created in the private markets (before the security enters the public market).

Additionally, we might also see a lot of large companies remaining private for a long period.

We have invested in multiple technology and platform-based businesses via our $45mn venture equity fund, the LC Nueva AIF, and our recently launched $100mn venture debt fund, the LC Venture Debt Fund.

Investments have been across fintech, consumer tech, health tech, and prop-tech, from the pre-series A stage to the series B stage.

Even amongst our clients, there has been an increased focus on new-age companies which play the digital transformation/enablement theme.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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