- July 11, 2020
- Posted by: Kabir
- Category:In Conversation With
Industry Expert- Rishi Aswani, CFA
(Managing Director, Duff & Phelps)
Interviewed By- Parvez Abbas, CFA
(Member, Public Awareness Committee- CFA Society India)
Alternative Investments have gained traction over the past decade. They are increasingly becoming a preferred choice among the investors as they provide diversification to the portfolio. Information on alternative investments is not easily available in the public domain and requires expertise to value the transactions. In order to get more insights and what lies ahead, we interviewed Mr. Rishi Aswani, CFA who is a Managing Director in the Alternative Asset Advisory Group at Duff & Phelps.
Parvez: Alternative investments are considered riskier than traditional products. How has the alternative investment space evolved over the years? What are the emerging trends including focus on ESG factors?
Rishi: As always, the risk needs to be considered from an overall portfolio perspective, and what the impact of additive asset classes is on the overall return and diversification to the investor. I believe somewhere in the vicinity of 30 to 40 percent of foreign capital invested in India over the past decade was in the private capital space, however this share climbed to around 60 percent if you look at just the last fiscal year. However we interpret this, it sure tells us there is more appetite as alternatives are becoming more mainstream and integral to investing strategies. The other aspect of their risk profile to think about is that their valuations don’t reflect the behavioral finance aspects we’ve seen in financial markets play out since February 2020. As such, if you look at polls consisting of investment managers, the vast majority believes the volatility on private capital valuations will be to a smaller degree than what we see in public markets. No surprise as these investments don’t typically trade down as they would in a fire sale. From an India sectoral perspective, we saw a lot of investment in real estate and infra in the 2000s, and then healthcare, consumer, BFSI and financial services in the 2010s. We’re seeing new and old investors route a lot into infra and technology nowadays. Which brings me to ESG. It’s no longer a tick-the-box exercise. It’s an investor need, and fiduciaries need to serve it. It’s essential that funds and their portfolio companies choose, and disclose, ESG compliant strategies if they are to attract capital as they will now be subject to a customary screening process on this front. Some organizations have taken the approach to not simply add it on the agenda, but actually set up purely to address ESG dictums such as environmental, sustainability, and ethical, responsible practices. The ESG framework is evolving and can mean different things, but this is becoming a basic requirement in the private capital space.
Parvez: What challenges do you see in valuing illiquid and privately-held securities given the uncertainty in the current economic environment?
Rishi: There have been a number of challenges, as managers are grappling with the impact on their investee companies given all this volatility. Ultimately, one needs to use what is known and knowable, and that has changed to some extent in terms of both market indicators, as well as fundamental performance. In terms of market indicators, valuers are facing challengers in interpreting data both from publicly traded comparable companies, as well as transaction comparables. On the former, we observed both volatility (higher uncertainty) and a large sell-off (increased risk) by March. Most markets have recovered to a material extent, but now fundamental data has started coming in and multiples are looking unusually out of range compared with a pre COVID-19 situation levels. Anyone mathematically applying this information would generally be arriving at conclusions that would likely not make sense. Valuation implications from transactions negotiated in a pre-pandemic environment too, need to be taken with a large grain of salt, as it is almost a certain that their underwriting assumptions did not imagine the sudden and material impact of government actions, lock-downs and stay-at-home measures, and uncertainty represented by today’s environment on businesses. Finally, fundamental information has come in with an unthinkable drop in the early months once the lock-down began and there after the rebound for most hasn’t been to pandemic levels. It’s posed challenges on where fiscal year 2021 will end up, it’s posed challenges as to what a new normal is. It’s also posed challenges as to what fresh forecasts will look like.
Parvez: As you mentioned, past projections may not hold good and the performance in the coming quarters is expected to remain subdued for many businesses. What are your views on the portfolio activity? Would there be too much portfolio reallocation by the asset managers and increase in portfolio volatility?
Rishi: Agreed. We need to think through all the demand and supply side impacts in assessing what a new level of operating activity will be. All funds and portfolio company management teams are in a ‘war room’ situation where they are deciding how many balls they can juggle at once, and what actions are accretive versus what actions need to be deferred. Cash is king more than ever, so bolstering the liquidity situation is important. One way management teams are approaching the situation is actually looking at scenarios. Without a vaccine and cure, there’s no one certified assumption on how long business may be impacted/ need to change. Rolled up to a portfolio level, funds are faced with a triage situation – where to spend a disproportionate amount of time, where to inject capital to stabilize the business, or where conversely, to admit there is a permanent impairment in the outlook and take appropriate steps. At the limited partner level, there was a denominator effect felt during the sell-off, where limited partners are seeing large declines in their public market positions, often triggering balancing thresholds with their private capital marks, the NAVs for which are typically lagged or not as variable.
Parvez: In the 2008-2009 financial crisis, structured products became notorious primarily because of increased exposure to risky assets. Has there been any change in strategy by asset managers to deal with the current crisis?
Rishi: Correct, and that was prevalent heavily in the US and Europe. India had stayed away from that, perhaps given stringent regulations for banks here for investing in such products. I’ll take the second part of the question as this time it truly is different. The 2008-09 GFC did not entail a lock-down, as such the policy response to the current crisis is different in light of the pandemic. This crisis has also hit us much faster than the previous one, the world economy essentially changed in 6 weeks compared to what took place over a couple of quarters during the GFC. Interestingly, a number of asset managers were somewhat ready to move when opportunities presented themselves a few months back. They had missed the bus during the GFC and after nearly 10 years of a bull-run in the US, the longest on record, there was a sense that a recession was around the corner. No one had imagined COVID-19 of course, and so while there was preparedness, a lot of change is still underway in dealing with this crisis, from learning to operate remotely at all levels, and assessing those that will emerge unscathed or winners in the current situation.
Parvez: What advice would you give to young professionals who are experiencing the financial crisis for the first time in their careers?
Rishi: This is now the third recession that I’ve seen in my career, and they all pass. There is a large structural change in the way things are getting done, so keep an open mind and work with your company management at your respective firms to streamline processes and expectations. Change takes time, so it’s important to be patient and not take any decisions without taking a longer view. The rest is up to luck!
About Rishi Aswani, CFA
Rishi is a Managing Director in the Alternative Asset Advisory group and is based in Mumbai. He is responsible for overseeing Portfolio Valuations and Secondary Market Advisory in India. Rishi has over 17 years of financial advisory experience, both on the consulting and client side. His clients primarily include alternative asset managers, including private equity funds, hedge funds and credit funds across India, Asia, the Americas and Europe. Rishi returned to Duff & Phelps in 2015 through the firm’s acquisition of American Appraisal. Prior to joining American Appraisal, he has worked with Apollo Global Management and Avista Houlihan Lokey partnership in India.
Rishi has been a speaker on valuation-related topics at universities such as Harvard University, IVCA, CAIA Association, VCCircle, IVSC and ASSOCHAM. He is also a contributing author to journals such as IVCA and VCCircle platform. Rishi received his Bachelor’s degree in Finance and International Business from the Leonard N. Stern School of Business, New York University. Rishi has passed the FINRA Series 7 exam, is a RICS member and a CFA charterholder. In 2019, Rishi was selected for the “40 under 40” award by the AIWMI.
About Parvez Abbas, CFA
Parvez Abbas is a Manager in the Commercial Lending division at Acuity Knowledge Partners. He has more than 11 years of experience spanning across investment advisory, credit solutions and structured products. He has served clients including global banks and asset managers providing assistance in securitization, credit risk management and portfolio monitoring. In the past, Parvez has worked for Cians Analytics, Genpact and American Express. He is an MBA finance and a CFA charterholder.