If $15b private equity inflow is not investment cycle, then what is: Manish Chokhani
The Economic Times | October 17, 2015
Manish Chokhani, governing body member at FLAME University, says we are a volatile, schizophrenic market globally, and until there is a reset in the world, probably through currencies, we will not really start a great expansion recycle. Excerpts from an interview with Nikunj Dalmia.
Nikunj Dalmia: The unique edge of FLAME as a University is fine arts and management together. It rarely happens. Can it happen? Can it coexist?
Manish Chokhani: Well, it is liberal arts. So fine arts is one element of it, but liberal arts and science are really the whole gamut of studies that one can do. The way I like to introduce it is, if you think of the analogy between the old SSC system and the new IB system, where in the SSC system you read, memorized and reproduced and the IB system introduced you to a whole array of subjects where you are planning, then you are doing the task, then you are reviewing it and then you are doing the whole cycle again like a management student. Liberal arts is the way the US has built its whole education system.
And we know why so many Indians go there to study. The objective being that, you can first get the whole width of things, so that you understand the world in its entirety rather than through a very narrow prism of science or arts or engineering. And then you can get into the depth. After you experience the width, you can get to the depth.
You can go deeper into a particular field and nothing prevents you from having a major in, as you said, management and another minor in one of the psychology of political science or economics or something of that nature, which may be very different from your major. It just makes you a much more complete person. It is really a good person who becomes a good investor because then you have awareness of 360-degree what is going on in the world. What we offer here, therefore, is a very immersive experience as well as enough room for you to explore and grow as a person.
Nikunj Dalmia: The good thing I guess perhaps about this university is that it has been backed by investors who know the art, who know the finesse and who understand that what a great investor needs or do is to differentiate. So is that an edge for this university?
Manish Chokhani: With all honesty, you use the word investors in plural. It is really the vision of our founder Nemish Shah, who has endowed this university. It is completely not for profit and what we like to do is offer the whole experience of education, which people try to get overseas in India itself. The campus, as you see, is comparable to anything else anywhere in the world.
Nikunj Dalmia: If I just run through the governing body of FLAME University, some of the key speakers who have been there, some of the board members they are mavericks, marquee investors and they are successful people in their own strata. So in terms of experience, do you think it is a necessity in today's time to have a wider understanding? Is it important that in today's environment you have to co-exist in two or three brackets?
Manish Chokhani: Absolutely. I will give you two small examples. You think of today, if you grow up in the old system where you learnt accounting and you did not know what was going on in China and you did not know what was going on in Brazil and you did not know what was going on in the US, it would make you a very poor entrepreneur. It would make you a very poor investor. So, you do have to have that consciousness of what is happening around the world.
Flip it to the next part, if you only look at things from say a financial prism, you will never see the juxtaposition which is going on in the world today between, let us say, technology and design. Take Apple as an example. It is a left brain-right brain combination, which is coming together. If you were only a technologist, you would never have created an Apple.
If you were only a design student, you would have never created an Apple. It is when you get these two faculties together that you create something outstanding. If you think of the way people are now building the new economy in the world, whether it is using the genome, whether it is using battery-powered cars or indeed the new form of energy, it is various streams coming together. Because life does not come neatly packaged as a physics problem, or as a biology problem or as a design problem. It comes as a messy problem, which we have to solve as entrepreneurs.
As investors, you have to have the pattern recognition to see what is going on and which field can give you an insight into what is going on over there. It was illustrated very beautifully by Charlie Munger, who is our guru as well, in his famous lecture where he talked of having mantle models of every discipline because that becomes part of your common sense. What we are hoping to do by way of this sort of education is widen your common sense, instead of just making it very narrow.
Nikunj Dalmia: When I talk to people privately and publicly, the first recollection they have of FLAME University is that a marquee investor is backing it and this is a university for me to go so that I can learn how to be a great investor or a great financial wizard. But this university is not about that, it is beyond that?
Manish Chokhani: Any good investor first has to be a good human being. He has to be a self-aware human being, who knows what is happening in the world. A good investor, as Mr Buffett says, is a good businessman and a good businessman is a good investor. I would now venture to say that this is sort of stage III of our life, as you call it vanprastha where you can give back. So, if you are a good investor and you cannot give back, are you a good investor? That evolution of a human being is what one really would hope to create with a bunch of students coming out of here who can change the world.
I will give you a very small example of a person who is well respected in India, who came out of liberal arts and who actually, I think, did finance major and that was Anand Mahindra. Now you would never think of an industrialist as successful or with as much bandwidth of businesses from engineering to finance to technology to what have you. Or even Ratan Tata, he came out of an architecture school in Cornell and he ran the Tata Group. So to slot people saying that because you have not got a business undergraduate degree, you will not be a good businessman or a good investor is the old typecast, which are really the shackles one is trying to break.
Nikunj Dalmia: Sure. Of course it is a differentiated approach. But just before we move on to the other segment and talk about other elements...
Manish Chokhani: I just want to say one last thing, our aspiration is not to create people looking for jobs but to create graduates from here who will create jobs. So they will be leaders.
Nikunj Dalmia: Doesn't that look a bit far-fetched?
Manish Chokhani: It will happen, like I said, a university is not built in a day. It did not take Stanford three years to get built or Harvard three years to get built. They are 150-year-old institutions. We will get there and with the resources we are able to bring to the table, we want to give it our best shot. We are not averse to picking up the phone and calling up companies to take students from here.
Nikunj Dalmia: Rome was not built in one day.
Manish Chokhani: It is not...
Nikunj Dalmia: Every time you come on the show, we have to talk markets. It has been stormy, it has been choppy for global markets, August was stormy, and September was scary so far. October has been solid. Do you think the worst is over?
Manish Chokhani: As I have been saying for the last five to seven years, the world has been a really sick patient and it is being brought out of its disease with the same cure which caused the disease. So it is not going to be solved in a hurry and it is going to remain schizophrenic. So you will get these bouts of despair where you think things are going to blow up. So a 2 per cent move in China changes the force of gravity and you feel everything is going to go down the tubes and I better sell and get out as quickly as I can.
And then, four weeks later, you will get a response which says let us print a lot more money and put it into the system and you go back into euphoria that there is no rate cut, there is more liquidity coming and let us celebrate again. So in these alternating bouts, to call it a bull market or a bear market is probably wrong. It is really a volatile schizophrenic market. Until there is a reset in the world, probably through currencies, we will not really start a great expansion recycle. Also, a lot of the action is happening outside the markets. Like private equity money flow into India this year is a multiple of the money which
FIIs have brought in.
Nikunj Dalmia: How much is that?
Manish Chokhani: This year we are on track to doing maybe $15-16 billion of inflows from the private equity industry.
Nikunj Dalmia: It is four times the FII investment.
Manish Chokhani: Yes, four times of FII investments. Although FIIs at one time were $8 billion and then four has gone out, but what I am saying is that the excitement, a lot of, it has shifted outside the main markets, because if you think of it, a lot of wealth creation -- whether it is in the US or in India or indeed in China -- has been happening outside the so-called old economy companies. For every Apple, which is listed, there is a Uber in the private domain. In India, there may be an Ola and stuff like that. So, there is serious money and when people say the investment cycle has not revived, I sometime smile because if $15 billion of private equity money coming into India is not investment cycle, then what is?
Nikunj Dalmia: It may not be hard infrastructure but things are happening on the ground.
Manish Chokhani: If you think of it, the agricultural economy ended at a particular age and the way China has built capacity for 60 per cent of world having 10 per cent or 15 per cent of world GDP, the age of manufacturing is probably in a deflationary environment. So it is a tough period to...
Nikunj Dalmia: Just because there is excess capacity in the world?
Manish Chokhani: Yes, I mean, who in his right mind is going to put up a steel plant for the next 10 years.
Nikunj Dalmia: For the longest time you have always maintained that the India story has to be weaved around financials. We are underbanked, banks are under-penetrated. Is that thesis still evolving? Are you still of the view that do not go to PSU banks, buy private banks? Digitisation is happening there and the best of banks now have got great apps?
Manish Chokhani: Again it is the same old story. If we are a $2 trillion odd GDP economy and, we save 25 per cent, we are saving about $500 billion a year.
Nikunj Dalmia: Which will only go up?
Manish Chokhani: Which is only going to go up, whereas the GDP from $2 trillion is hopefully going to go to 5 or 6. When we started in 1990, China was the same. Today China is $10 trillion, it is 5 times. So it says a lot for what we missed and the opportunities we missed along the way. But let us say, we get to $5 trillion, let us say we stay with the 40-50 per cent saving rate, it is trillions of dollars of saving. Today of the $500 billion, we are barely putting half into financial assets. It is going into real estate, gold and other half.
Nikunj Dalmia: But that reset has started already.
Manish Chokhani: That has already started. You are seeing flows into mutual funds, for example. You are seeing the whole move towards insurance and pensions. All of that will happen. So this share -- which is 50 per cent of savings -- will go higher and higher to financial savings and the pot itself would be growing. Within this pot, 75 per cent of the banking sector is controlled by the public sector. Now we do not have to be a genius to see that the share which was 100 has eroded to 75 and it is going to erode only more as we go ahead. Secondly, with the way banking is now done, I do not know when was the last time you went to a bank branch or you wrote a physical cheque. It is becoming more and more digital.
Nikunj Dalmia: Private guys will gain because of this?
Manish Chokhani: You look at all the leaders, HDFC, Axis, all of them. They are already having digital platforms over there. With the new licences, which have been given to payments banks, mobile companies have come into it. Apple will come into it with ApplePay. So the whole new ecosystem will evolve.
Nikunj Dalmia: Whereas India is still the engine for IT outsourcing, the numbers are showing that yes we are getting a disproportionate market share and Indian companies are getting disproportionate market share. The new confusion is that can Indian companies really move up the value chain? Is digitisation actually bad news for Indian IT companies because so far they have survived on application and EMD services? The way these PE multiples have contracted looks like there is a problem in the world?
Manish Chokhani: You are right. In the public space the legacy model of adding people and doing coding is naturally under pressure. Leading companies are changing themselves and going towards robotics, artificial intelligence and all of that. So that is a great move for them. I think they will only keep gaining market share. I am not as bearish as the market is saying that these should be 12, 13, 14 PE stocks.
Nikunj Dalmia: There is an opportunity?
Manish Chokhani: There is an opportunity there. And there is serious cash flow there. These are among the most enlighten management teams in our country, who have demonstrated real ability to scale and play on a global scale. In a global portfolio, these stocks have to be there. As an Indian, this is really your best option in the listed space. Having said that, is there an opportunity for Indian IT companies in the new age?
Yes, there is. It is just sad that they are not yet in the public domain. They are all happening in the private equity space. A lot of it is happening outside India, because companies are setting up overseas because of ease of doing business or taxation of whatever, but it is fundamentally Indian people who are creating these companies.
Nikunj Dalmia: So are we looking at what happened in 1999, when we were in the dot-com boom, which only the best of the companies survived?
Manish Chokhani: The good news is, unlike 1999, this time the whole valuation bubble is not happening in the public domain. So there are three or four large players in the world who are fuelling this.
It really got triggered a lot with the Alibaba listing. So if you take Alibaba itself which has now invested in PayTM, Softbank which has invested in Snapdeal, Amazon itself which is here in Amazon India and then Tiger, which has gone into Flipkart. These are the sort of four big entities putting money into technology in the private space. The way a lot of the agreements have been written, there is liquidation preference available to the private equity players. So in a downturn, it is not really the investor who will suffer the most.
It may well be the entrepreneur who will get diluted a lot more. So, it seems frothy. You have also got the public market players in the US. So Fidelity prices have come into this domain and they are invested into Uber and companies like that. It is all happening, but like I said, fortunately it is not in the public markets.
Nikunj Dalmia: So luckily India does not have too many so-called e-commerce or the apps company if anything goes wrong in this part of the world, whenever it does? Because one day something will go wrong?
Manish Chokhani: Someone will get hurt, because all this cannot keep going on forever. In the meantime, India has a $3 billion stimulus package coming right because of all these investments coming and giving goods to Indians at cheaper prices. It is good news for our economy.
Nikunj Dalmia: So ecommerce is pretty much like airlines, great for consumers but never good for investors?
Manish Chokhani: I think, you are brushing all ecommerce in that. It may be e-retailers are currently playing World War II in some sense, because the battle for the US is done, the battle for China is done, really the battle for India is going on right now. A couple of them will win and they will be big winners. So if you are going to be a $4-$5 trillion economy and if you are playing the space, if you have that time horizon, there is money to be made here. So none of these I am saying are fools who are putting their money here. Their horizon is a lot longer than what it may be for a public market investment.