The Portfolio Management Services (PMS) sector in India is witnessing quite an upsurge today. Also, investors are increasingly seeking tailor-made service delivery as per their varied expectations. However, despite rapid expansion, the industry faces pressing obstacles that prevent mass acceptance, due to its large ticket size. Investors into PMS’s face different set of challenges too. To elaborate, funds who frequently churn their investments face larger tax implications denting investors overall returns, many portfolios lack differentiation making diversification across different PMS’s meaningless, large cap focused PMS’s typically end up being more expensive due to higher fees as compared to mutual funds, although investors in these cases could potentially achieve better results through ETF investing. Another common challenge that impacts investors is the fact that most PMS’s charge a yearly performance fees on a markto- market (MTM) basis. While fund managers end up taking their share of profits upfront, investors are left lurching in case if market turns downwards post that, making their wait longer for wealth creation.
Equitree Capital, under the co-founders Pawan Bharaddia and Ssuneet Kabra, has been successfully mitigating the aforementioned challenges by implementing a niche approach to long-term wealth creation. The company follows the private equity assessment with public market flexibility to cherry pick promising small and micro-cap businesses. The company maintains a focused investment strategy, typically holding just 12-15 companies in its portfolio at any given time. This disciplined concentration reflects the company's commitment to quality over quantity. It cohesively ensures clients’ interests by collecting fees only after clients hit a 2x portfolio threshold, rather than yearly basis, thus reducing tax implications and allowing compounding to do its magic.
"We are very, very long-term investors. Our holding period is as long as five to seven years. Unless we are selling, there is no tax, so posttax returns are actually slightly better," signifies Pawan Bharaddia, Co-Founder & CIO, Equitree Capital.
Pillars of Equitree Capital's Philosophy
Equitree Capital has become one of the frontrunners in the PMS realm due to its unique offerings. They’re more business-like investors, i.e. they follow a ground-up approach where they look to find businesses that are run by stellar promoters, available at attractive valuations and are at their inflection point of growth. This recipe poises them to gain at least ~20-25 percent IRR on their capital over a 3-5 year cycle on account of the real profit CAGR rather than hoping to create wealth by betting on re-rating of valuation multiples. Over the past 12 years, the team has carefully selected only 42 companies for investment. The results speak volumes, wherein, they have a hit ratio of 85 percent which has delivered minimum returns exceeding 30 percent CAGR in each of these investments, while lessons from the remaining positions have further refined the company's selection criteria.
Equitree Capital's prowess stems from its ability to transform perceived small-cap risks into opportunities through meticulous research, patient capital deployment, & private equitystyle value additionSsuneet Kabra & Pawan Bharaddia, Co-Founders, CEO & CIO
The company has achieved remarkable performance outcomes over five years, growing at a CAGR of 52 percent. This trailblazing performance has earned them the no. 1 Best Performing Small Cap award on a 5 year return basis in the recently concluded award ceremony held by PMS AIF World in association with IIM Ahmedabad. Equitree Capital has also been consistently in the top 3 spots on a 3 year and 5 year basis, as per PMS bazaar.
For investors tired of generic investment products, Equitree Capital offers a compelling alternative, which is customized wealth creation where partnership and long-term business fundamentals take precedence over short-term market noise.
Capitalizing on the opportunity
Equitree Capital has demonstrated significant resistance to market downturn by declining only 7 percent during the last six months while the broader small caps dropped 30-40 percent. This is primarily attributed to their staggered investing philosophy, deploying capital basis company’s execution and taking necessary cash-calls.
While people get jittery in market downturns, Equitree Capital leverages its understanding of the businesses reasonably well, thus navigating high volatility situations to build-up the portfolio for investors, which lead to better XIRRs over a longer-term.
"We've learned to double down on what we know best", explains Pawan.
A Noteworthy Journey
Equitree Capital started its operations as a proprietary investment office that invested in small and micro-cap companies through a private equity-like approach. Their initial investment success with a 42 percent portfolio return in 2014 came despite seeing a 30 percent drawdown in 2013. This resilience helped them gain more interest from their well-wishers and professional circle. The company received a PMS license in 2017 but didn’t take any meaningful third-party capital due to the frothy valuations back then and postponed fundraising until 2020, which turned out to be beneficial due to the post-COVID market opportunities. Within a period of five years starting from April 2020, Equitree has managed to grow its AUM from ₹5 crore t o ₹612 crore.
“We implement three key differentiating factors that include investing alongside our investors at all points in time (skin in the game), keeping investors interest foremost by charging performance fees back-ended and maintaining complete transparency and communication”, explains Ssuneet Kabra, Co-Founder & CEO, Equitree Capital.
Equitree Capital provides investment services to family offices, CXOs as well as professionals while targeting ₹2,000 crore in assets under management (AUM) by maintaining its specialization in micro-cap investing. Going forward, the company would continue to be focused on hand-holding its clients in steering a robust financial roadmap with utmost trust and transparency.
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