‘I’m no fan of IPOs; PE funds getting out itself an indicator’

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Zerodha co-founder Nikhil Kamath set up True Beacon, a hedge fund management firm, in 2019. True Beacon initially launched a Category III alternative investment fund (AIF) aimed at domestic investors in September 2019. It followed it up with a similar fund in GIFT City, Gujarat, in 2021 aimed at foreign investors and non-resident Indians (NRIs). The firm now manages around 1,000 crore of assets. Kamath spoke to Mint about initial public offerings (IPOs) and his perception of market valuations.

We seem to be in the middle of an IPO season. What is your perspective on IPOs?

I have shied away from investing in IPOs historically. In the origin of a company, many investors invest before an IPO. In many cases, these guys are getting out in an IPO and liquidating to the retail public.

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If you were to track IPOs in the last decade and compare the prices with present figures, I don’t think IPOs have done too well. I’m not a big fan of IPOs; nor am I a big investor in them.

The fact that private equity funds and venture capital funds who have been part of a company’s growth trajectory till the IPO and are getting out in an IPO is itself an indicator.

That said, IPOs in future will no doubt drive startup growth. Zomato, for instance, has redefined the food and delivery industry.

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What would you say about investing in IPOs for listing gains?

I don’t think that has done too well. I had done some research around this a couple of years ago where I tracked stocks that went into IPOs. In more than 30% of such cases, companies traded below the issue price on listing.

Are you helping clients get deals in private markets?

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True Beacon has 300 plus ultra high net-worth individuals (ultra HNIs) who are prominent in their own industries in their own way. If we come across a good deal, if someone who owns a private company wants to raise capital, we will highlight them to our clients. Investors don’t usually have access to such opportunities. We will filter out such deals and enable investing in them for our clients. That said, valuations on the public side are inflated but valuations on the private side are inflated twice as much. This situation is why we are hedged 50% in True Beacon One (our domestic hedge fund). We are okay to lose that last per cent of the upside, but if some correction were to happen, we will focus on preservation of capital and remain on the side of capital protection.

How about commodities as an investment? Has the cycle turned?

The cycle did not turn due to fundamental reasons but rather due to liquidity which has been available for a while. If you take crude, steel or gold, prices have not shot up due to more consumption. Manufacturing has been slow over the past year. The outlier is the amount of currency printed in the US and this money is driving up inflation through commodity prices. The way we gauge inflation today in India and other countries needs to be examined. It is detrimental for the government to declare a higher rate of inflation, since this would need interest rate hikes. I don’t think commodity prices are being reflected in the inflation numbers at a ground level.

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So, there is overvaluation across all markets?

Yes, across the globe, markets look overvalued. Recently, we have been getting a lot of IT results. Infosys, which traditionally traded at a 20 times multiple, now trades at 30 times. It is not just expensive but really expensive. Take the instance of chemical companies; they are trading at 18 times sales. It is similar in the US and Europe.

At the end of the day, while I wish a stock would rise according to earnings, that’s not the case. If more people want to buy, the stock goes up.

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With major central banks around the world setting interest rates around the world at 1%, would it make sense to borrow at 1% and invest in higher yielding assets? A lot of people are thinking along these lines.

You have launched a hedge fund for offshore investors in GIFT City.

Yes, the taxation there is a big benefit. Traditionally, people who came in through the foreign portfolio investment route always went through a hop—Singapore, Cayman, Mauritius or Luxembourg. That hop was costly; it would take up 50-100 basis points in costs a year. GIFT City changes that with a compliance regime comparable with Mauritius and because there is no tax on profits from trading in derivatives. Domestic Indian investors doing the same thing (derivatives trading) outside GIFT City have to pay taxes at slab rates that could go to more than 40%. Derivatives, which individuals use for hedging, should be taxed at a lower rate. That said, GIFT City will divert to itself a lot of money that would have otherwise come through Mauritius. It will become progressively more popular.

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