India’s rising investability

India’s growth story needs no introduction. Its demographic dividend, rapid urbanization and expanding middle class are powering consumption and economic growth. India is expected to grow its GDP per capita from about $2,300 to about $5,000 by 2030. With a mobile first, technologically savvy, growing workforce, it will soon have the second largest base of online shoppers in the world. This growth is being supported by an increasingly business-friendly tax and regulatory backdrop, maturing pro-growth reforms as well as an English-speaking common law legal system. India’s reform agenda has seen it greatly improve its ranking for ease of doing business as the bankruptcy and tax codes have been simplified and regulatory processes streamlined.

Millingtonia believes India will be one of the biggest beneficiaries of a multi-polar world. This includes significant economic benefits from a diversification of global supply chains away from China as well as deeper partnerships between India, the United States and Europe. The government’s well-timed policy support through PLI schemes (Production Linked Incentive schemes) in high technology, export-oriented sectors has spurred large scale capex investments to develop local supply ecosystems, and global bellwethers such as Apple and Samsung have begun shifting some production to India. 

Despite this, India still punches below its weight as a destination for foreign equity capital. India was historically seen as an “allocation” within emerging market funds. Millingtonia believes this is set to change as these new growth drivers enhance the “investability” of India. “We see a shift in approach to India when we speak to potential investors,” says Misha. Millingtonia publishes a lot of material on topics such as regulatory changes, technology developments, private company conversations and other aspects of investing in India. “As we build our fund, one of our goals is to help illuminate interesting aspects of the evolving Indian investment landscape for our investors,” says Sasha.

Global lens combined with local context

The duo have refined their investing toolset over 20 years. Their backgrounds include stints at firms such as Blackstone, Bain Capital, Jericho Capital, UBS and JP Morgan. They have been investing in India for over 15 years. Misha was a founding member of Blackstone’s India private equity business in 2005. Sasha helped take some of India’s biggest IT companies public in the early 2000s. Through these experiences, they built a vast network of relationships in India at board and senior management levels. Misha has also invested across the technology and payments value chains in Brazil, Japan, Russia and other markets globally.

This experience leads them to view India through the lens of a global investor and they also understand the local context and cultural nuances of investing in India. This is a powerful combination. Their language fluency in Hindi (the national language) is essential for primary due diligence on customers, suppliers and competitors; an important differentiator in a market where expert networks are much slower and significantly less helpful than Millingtonia’s own extensive network. 

Investment philosophy

Millingtonia’s investment philosophy combines key lessons from prior roles, melding a private equity mindset of longer term investing with an approach to understanding the key considerations of technology buyers supplemented by a robust risk management framework. The firm believes investing is an “apprenticeship business”. “Blackstone taught me about the importance of betting on high quality management, those that are flexible, nimble, forward looking, understand unit economics and have the ability to adapt,” says Misha. By being on the ground in India full-time, Millingtonia spends a lot of time with the senior management of its portfolio companies. “The best Indian companies have global ambitions, and they want to learn from our experiences globally as much as we want to learn from them. This back and forth with the senior leadership of our portfolio companies is a key part of our process of tracking and monitoring our positions,” he says.

When describing his five years at Bain Capital’s public equity hedge fund, Misha highlights lessons learnt on industry structure as a determinant of sustained industry profitability. “We like to see a stable industry structure with structural forces for persistent profits, such as scale economies, barriers to entry such as network effects or customer acquisition costs, and technology IP,” he says. His biggest insight from his time at the fund was to focus on the technology buyer’s pain-point and the unmet need the technology was solving. Misha, who also has a degree in computer science and worked in a technology startup, can speak on the same wavelength as developers and technology CEOs. “Technology is ultimately bought by individuals, and understanding the nuances of the pain-point the technology solves, the inefficiency it eliminates, and the considerations of the buyer are a key part of our process,” he says. 

Recalling his most recent role at Jericho Capital, Misha emphasizes risk management. “To navigate all types of markets, correct sizing of positions is very important,” he says. “The practical investor not the dogmatic investor wins,” he adds. Sasha’s time in energy research brought with it a macro-overlay that helps inform inputs into the fund’s risk management processes. For example, Millingtonia incorporates market forces such as foreign capital flows into its proprietary risk system.

Despite choppy markets since launch, Millingtonia is up since inception and up double digits this year to June. “Volatility is always going to be present in emerging markets. Our job is to take advantage of the volatility with our long investment horizon,” says Sasha. “We systematically analyse our mistakes, as well as our successes. We do an annual post-mortem of what has worked best over the last year and what did not work,” he adds. 

Wide idea funnel, high discovery value

The duo have had complementary industry coverages over the years, with Misha focusing on technology, payments, industrials, and consumer businesses in his prior roles. Sasha’s sector experience includes energy, payments and technology. Given this overlap, technology, internet and payments businesses represent the majority of the portfolio. “You have to be on the ground in India to appreciate the pace of the shift to digital taking place,” says Sasha. “For example, the value of instant digital payment transactions last year in India was much greater than in the US, UK, Germany and France combined”. 

The theme of digital and technology transformation is impacting all sectors of the Indian economy and Millingtonia is comfortable stepping outside the boundaries of traditionally defined technology sectors to find businesses that are being impacted (positively or negatively) by digitization and technology transformation. This gives the fund a wider investment universe for hunting ideas. “We have covered a number of sectors over the years,” says Sasha, “and we don’t need to be confined to only one sandbox for ideas as we invest behind digitization.” The fund prefers secular versus cyclical growth stories and avoids directional bets on commodity prices. 

From a market cap perspective, small and mid-cap stocks with high discovery value comprise the majority of exposures. Several of the positions in the portfolio have little or no sell side research coverage. Millingtonia was only able to diligence these positions by virtue of its local presence. Tellingly, for one of the fund’s larger positions, the CEO had remarked that Millingtonia was the first institutional investor to visit their offices!

Some areas the fund sees opportunities in include 4G/5G enabled platform businesses, home grown software-as-a-service (SaaS) companies, penetration stories in the travel and hospitality value chains, the China + 1 imperative driving a shift in high-tech supply chains to India, and energy transition stories such as the electric vehicle supply chain. 

Repeatable process, focused on valuation

Millingtonia’s investments are first vetted using a bottom-up research process including India-specific factors to develop a point of view on earnings growth and sources of potential upside and downside risk. The fund believes in the value of primary research, relies on its extensive network, and builds its own data trackers for pricing, volumes and key trends. “We are very process oriented,” says Misha. Recent investments that the fund has profiled in its quarterly letters include a technology player in the travel industry and an integrated electronics solutions provider for the defense and aerospace industry. In both cases, Millingtonia’s primary research on cost structure and technology drove conviction in underwriting strong multi-year revenue and EPS growth profiles. Extensive conversations with management and parallels of similar technology shifts in other markets globally increased conviction in the ideas and informed position sizing. Both companies are also benefitting from industry tailwinds that, “Skew the range of potential outcomes in our favour,” says Misha. For example, India’s travel market is undergoing a secular shift online and will see an immense build-out of infrastructure as India adds 75 new airports by 2025 and an order backlog of over 1,500 planes gets delivered. 

“Valuation is a key input for our margin of safety assessment,” says Misha. In 2022, the fund stayed away from high flying growth stocks due to valuation and elevated burn rates. In early 2023, after a valuation reset with these stocks 40%-60% below their highs and management conversations suggesting a refocus on unit economics and profitability, the fund selectively initiated a few positions in these former high-flyers. These new positions have been very profitable. 

Portfolio construction

The fund typically holds between 20-25 long positions and 10-12 short positions. The fund takes a long-biased approach given the macro tailwinds India is benefitting from but has the ability to flex its gross and net exposures. The strategy is currently scalable to about $750 million which will increase every year as India’s equity markets continue to deepen. The fund also can do privates, capped at 15% in the main fund with the rest through co-investment share-classes. Given valuation considerations, the fund has not engaged in any private investments to date. “Top quality service providers ensure the operations of the fund are best in class. Millingtonia’s custodian, prime broker and fund administrator is a top tier Indian bank and the largest domestic custodian for alternative investment funds; the fund’s auditor is a big 4 accounting firm, and its brokerage relationships include a top global investment bank and a top 3 bank in India,” says Sasha.

ESG opportunity

Millingtonia sees a big mismatch between the large sustainable investment opportunities in India and the breadth of investor capital focused on these opportunities. India is committed to a green energy transition to reduce dependence on imported oil and control air pollution. Policy support is providing a massive impetus for investments in electric vehicle infrastructure, deployment of high efficiency solar panels, and advanced battery development among other technologies. Indian companies are just starting to comply with ESG disclosure requirements, the first iteration of which comes into effect this year. Millingtonia has carried out an exercise of mapping these new requirements onto the EU SFDR framework. The fund believes that the vast majority of the portfolio of the main fund would comply with EU SFDR investing standards. Millingtonia also plans to launch an ESG dedicated fund in the future that will invest alongside its main fund.