In conversation with Mr. Prateek Pant

We started the year by welcoming Mr. Prateek Pant as an additional member of the Investment Committee of our Equanimity Fund II. We had a chance to sit with him for an insightful session on the overall market outlook and his personal journey over the years.

How will public and private markets fare in 2023?

Prateek: One-year time horizon is too short to predict how the markets will behave. Based on the current market trends, one could directionally point out on how the economic cycle may play out. Both The Fed and RBI have continued to focus on inflation and announced further tightening with no clear visibility on the end game. This creates pressure on liquidity and flows into equity markets.

From a short-term risk/ return assessment, there seem to be more opportunities in fixed income at these elevated levels of interest rates. However, time and again we have seen markets to surprise when the consensus view gives a different picture. For example, during the pandemic in March 2020, no one expected the markets to do so well when economies were under a lot of stress and it turned out to be the year for the markets in a decade. 

Broadly, India has fared relatively better than emerging economies which is why India is at a significant premium to EMs. Having said that, it is impossible to foresee future developments with any degree of certainty, it’s like flipping a coin and trying to predict an outcome. 

Where do you think  India is heading in the next 4-5 years with the $7 trillion economy mission in mind?  

Prateek: When viewed through the prism, India is a vibrant democracy with stable political institutions, an independent judiciary, and strong monetary and regulatory institutions. The last decade has shown us that overseas investors have placed a premium on countries with functioning democracies and strong institutional structures. 

With the distinction of being the most populous nation which has a chugging growth engine, the knock-on effects will be seen in many sectors in the unorganized space. In the last year, we have seen a proliferation of consumer brands listed in clothing, snacks, and even footwear. The financial sector has seen insurance companies, broking businesses, asset management companies, and the first wealth management business go public. Recently a homegrown wine business was listed on the markets. Such sectors are relatively small in India and hence the market leaders in these sectors are small. Over time, these sectors are likely to transition from being today’s micro caps to tomorrow’s mid and large caps. 

Which are the sectors that look good over the medium term?

Prateek: I believe that consumer space is expanding both in private and public markets. Private label markets and D2C brands are witnessing an explosion as distribution models get disrupted. As we begin to reap the benefits of demographic dividends and as people move up the value chain, various sectors around consumption will present appealing investment opportunities. 

A sector that has limited opportunities on the listed side, but is seeing green shoots on the unlisted side, is healthcare. Although the sector has always existed, it is now experiencing a shift from unorganized to organized.

In the listed universe, one area where we continue to find opportunities is in the financial sector, which encompasses a variety of sub-sectors like NBFCs, banking, insurance, mutual funds, wealth management companies, and broking. 

Generally, public market investors are wary of investing in the Indian startup ecosystem. What convinced you to startup investing and what are the public market investors missing out on?

Prateek: I have been investing in private equity markets for about a decade. As India moves from a $3 trillion to $10 trillion economy, there are going to be many investable opportunities that do not currently exist in the listed universe. India has been about a decade behind China and much more than the US in terms of the evolution of its economy and capital markets. In fact last decade, the US has seen shrinking publicly listed companies and alpha creation opportunities maximized in the private markets. In these companies, wealth is being created in the private markets and the companies list only at maturity. Case in point Uber, which was a $75 billion company before listing. In my opinion, India is at an inflection point where private markets are great opportunities if carefully curated and valued before they go public. Investors can ride this entire growth story by catching on to these trends early in the private market.

How has your style of investing changed over the last decade, having exposure to both public and private markets? 

Prateek: On the public investment side, I have believed that boring philosophies are exciting for my returns. I have deployed my core portfolio in Flexi-cap strategies and supplemented it with some thematic ideas and international funds, Due to my exposure to product due diligence, I spend inordinate time picking good managers and then letting them do their job. I don't spend any time looking for trading ideas or stocks.

While public markets have 3-5 year horizons, you need to be a lot more patient with private markets (at least 5-7 years). So, when I first invested in private space, I spent considerable time with angel groups to understand this ecosystem. Over period, I realized that even here the trick is in identifying great managers and selectively co-investing in specific opportunities in addition to the fund. I have always preferred managers who are more active investors in the investee companies and keep a close eye on their investments. I think that a more hands-on approach to investing is more effective than a spray-and-pray approach.

What are the typical risks you assess when investing in early-stage investments (and of course potential rewards)?

Prateek: Broadly, early-stage investors should focus on areas such as the founding team and scalability.

It is important to see the background and cohesiveness of the team. You can have superstars who are poor team players. An early-stage investor could derive comfort by looking at the track record of the founding team. 

Every founder believes they have the most disruptive idea. What is important, is to understand whether the timing is right. Are there some immediate tailwinds? Is the model scalable? Is this a big idea in a small industry or is it a small idea in a big industry? What are the potential headwinds? Important to put your numerical hat on and do a stress test on the business projections. 

Another important consideration is the exit route present. Can the investor foresee interest in the next round of funding? One of the biggest risks, where one can get stuck is illiquidity. That is why an understanding of the exit mechanism is very important.  

What makes a good early-stage investor?

Prateek: Try not to place all your eggs in one basket. You must be able to diversify across industries, time periods, and managers. There are times when even the greatest ideas fall flat because they are much ahead of their time, and even the best teams can fail if the market doesn’t support them.

One piece of advice you wish you had gotten early in your career?

Prateek: For about 2 decades, I worked in the “established and stable” multinational environment, finding comfort and career. In hindsight, should have been proactive to evaluate changing dynamics both professionally & as an investor at least a decade ago. The confluence of financial services & technology has been at the forefront of disruption and changing consumer behaviors.

What is one piece of advice for a startup entrepreneur and a startup investor?

Prateek: To founders, I advise understanding your core strengths, embracing them, and delivering on them. It is great to have longer-term visions, but you must break that into immediate deliverables in the initial three to five-year plan and closely monitor the delivery  It is easy to get distracted with a lot of noise around you thinking about future valuations without having delivered your core value proposition first.

For investors, the most important learning is to have patience. The volatility and cyclicality of businesses are companions in the journey of startup investing, so it is important to have patience and stay diversified across time periods, sectors, and teams in order to achieve success.