Capital Ideas transcript: Inside the rejig at Avendus, with Ranu Vohra

Ranu Vohra; Avendus

Ranu Vohra, executive vice chairman, Avendus Capital

Q. Avendus recently rejigged the roles of the three founders, what are the reasons for the same?
There has been tremendous growth over the last five years by any metric you may use, whether it is revenues, profitability, headcounts. We are anywhere between three to five times of where we were five years back. I think that with this kind of growth, you need to just step back and ask yourself, what do you need to do over the next five to ten years? I've been fortunate enough to have my two fellow co-founders, Gaurav and Kaushal, who have been with me in this journey. About six months back we sat back and decided we have to reconfigure the organisation.

We have several other businesses that have become meaningful; our alternative asset management business is one, and now, we run the largest hedge fund in the country. Our wealth management business manages more than 1,200 families' monies, and with over Rs 30,000 crores in our credit business, we have been impactful in in our own way in the mid market ecosystem. And a lot of our clients have been associated with us across businesses, so it was time that we said how do we offer services as one Avendus to our clients? Likewise, for our leadership, how do we collaborate? We have demarcated clear responsibilities. Kaushal takes over as the CEO of the credit business and Gaurav has several areas to look at and he becomes responsible for investment banking and other businesses as the CEO.

Q. As investment bankers who have turned into entrepreneurs, what are the biggest challenges in scaling up a business? Are the challenges different today from what they were when you started out?
The challenges at one level continue to be the same: The availability of talent, leadership. In businesses where we've found the right leadership and talent, things move faster. Also, scaling is a journey, right? You have to get something right and on the back of it, you can construct other things.

It has taken us almost 15 years to get investment banking to a point where we can say  it is a scaled up business. Similarly, in other businesses, things moved a lot faster, because we had capital, the right leadership, the right processes. It depends on what kind of vintage you have for the business. Are you fighting against the tailwind or a headwind? If it's a tailwind, have you been able to put all the levers in place for the business to grow and manage your risk? For example, if you've not done the risk management in an area like credit business—if you have been extra generous two years ago in doling out credit to the market, you would be in a different situation today. The biggest enemy of scaling up and compounding is if you have to take a step back. As it is, the markets and macro environment throws enough challenges at us.

I see a business as visible or relevant or dominant. Dominant is where we are among the first or the second in terms of mindshare. Relevant is when we are among the top five, and visible is where we exist in the business, but we don't have a real calling card in that manner. It's a journey for each of the businesses to get to that point of relevance and dominance, where then it can become interesting enough.

So, are the challenges different than what we saw earlier? No, as I said, these things were always the same. I think what has happened is that over the last 15 years, we've had varying macro environments. And it's not been easy. For instance, you recall the period from 2009 until 2014, which was without any tailwind. And then there was a period post 2017, where international investors had no liking for India. Whoever you would go to ask him for money for your funds would have a view on India, which was difficult to defend.

Q There is a huge mismatch in valuations in the private market versus public markets, what are the reasons for the same? What is your view on the froth in the capital markets?
If you look at the value equation, what was the value of private companies versus public companies 10 years back? Private companies would have been a much smaller percentage of the market in 2010. In 2020, the private company valuation and public company valuations are getting more and more balanced. At one count, there are more than 34 unicorns, which means that effectively, there is a sizable amount of value, which is now built into these private companies.

As an investor, I want to first look at public universe in an area, but you will find that in public markets there are certain bets you just can't make. You have to make them in the private space, and hence, the question of demand-supply. The commission will reflect that. For instance, education or health tech today are reasonably hot areas of the market. In most of the digital and tech businesses, there is a very sharp drop in value from the leader to the second to the third today. As a result, in certain industries, it is okay to be the 15th player, but in this case, God help you if you are not in the top three companies.

I would say public equities are also expensive, but for a different reason. What is a bubble today? Everything to me sounds a little virtual, a bit of a bubble, because there is so much liquidity thrown in there, it is impossible for us to see what is working and what's not. So effectively, you could see an enormous amount of volatility in the market next year. But overall, given the way things are, I think the market has been way too optimistic. If you if you were to very simply lay out the earnings growth and the corresponding valuations, it doesn't make sense.

Q. How is Avendus rewiring itself these days?
Digital and tech is a winner, because at the heart of it, such businesses are fundamentally made more robust. They're more startup-ish, they can pivot as compared to traditional organisations. In other businesses, like wealth, we have used the pandemic as an opportunity to get closer to our clients with a new leadership with the fencing. As the leader, we are constantly redefining our proposition.

In credit, we have gone back to the drawing board and said, this is the new world, which company is doing what now? How do we help companies within our portfolio currently? And what would we do with incremental lending? At the same time, we boosted our cash results. In a business where cash reserves are important, ours are substantial enough to ride any kind of volatility in the markets, or any moratoriums that might be extended. We have a portfolio with zero delinquencies; with all our lenders, we have been proactive in saying, we should give your money back.

In asset management, we have bolstered the core equity portfolio product, we've come up with an absolute return plan that has garnered a significant amount of investment already. We are experimenting all the time and it's been fun to see that disruption.

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