MONEY GAMES

Ajay Shrestha

CMD, iCapital

Deeply influenced by the accomplishments of Warren Buffett, Ajay Shrestha wanted to build an investment company that is run on the principles and ethics of Berkshire Hathaway. He established iCapital, an asset management and advisory company in 2013. A Kathmandu University topper, Shrestha specialises in Finance and has been engaged with national and international financial markets for nearly two decades with expertise in stock investment.

His journey to building iCapital came with a series of entrepreneurial explorations, enormous research, developing and building processes, and an unwavering focus on success.  In this edition of Business 360, we spoke to him about his business, the economic landscape, and what drives his investment decisions. Excerpts: 

What is asset management and what is its importance for Nepal?

Asset management is very new to Nepal, in fact, it is at a nascent stage at the moment. Usually, when we speak about assets, people think of only land and shares but it could mean a whole lot of things. The commodities that we have like gold and silver, our shares in a business, or even our own portfolio of businesses that we operate are our assets. Anything that generates value is asset. There are some non-tangible assets like credibility or brand which are also assets but mostly it deals with physical assets that generate returns.

These days many businesses have their own teams to manage their assets. If you look at the trend in developed countries a lot of entrepreneurs exit their business so they have a lot of money, millions and billions of dollars, after selling their business. Now what do they do with that money? Many have family offices that look after that money and it could get divided among the family members. Or at times some business houses or conglomerates get a lot of cash. So, a fund can be established and an investment vehicle can be formed with that fund. Or at times your business may not be doing good and you want someone to look after it or you want to hire someone on a contract or as a partner then that becomes asset management.

If I were to take care of your shares which you have invested in the capital market that also is asset management. If you have land and you want to do something with that land like sell it or build real estate property that also can be asset management. Management of any form of assets is asset management. Yes, the model could be different, for instance, we could have portfolio management services, advisory services, land management services, or family office management services. However, the crux is the same. If you talk about iCapital, the assets that we manage are of three categories – real estate, stock market and businesses.

How did the idea of iCapital come about?

Since the time I started reading books on investment back in 2007, I always wanted to open an investment company. I have read several books and articles written by Benjamin Graham, Warren Buffett and Charlie Munger who popularised the concept of value investment. Having read these books, the thought of opening an investment company of my own was always within my conscious and subconscious mind. In fact, this idea was brewing inside me from my undergraduate days. Though I was aware of the theoretical side of the concept, I was not prepared because I didn’t have any experience. I hadn’t seen the practical side of it. Hence, I spent seven years investing at a personal level. It was five years of individual investments and two years of being involved in the board of an investment company. That gave me a little bit of experience and encouragement that I could open and operate an investment company which I had always yearned for. I completed my Masters in 2010 and three years later I started iCapital, which is now an asset management and advisory company.

I have always been inspired by Berkshire Hathaway, owned by Warren Buffett, which is actually a holding company. It holds several businesses and they have about 400,000 employees. It is a huge conglomerate. So, my spirit is the same as Berkshire Hathaway but my size is small. I have always wanted to do what Buffett has been doing. Before starting iCapital I had a company called Source Code which is an IT company. I also had a company called Kaffeine Foods, a chain of coffee shops, and a manufacturing business called SB Textiles.

Along my entrepreneurial journey, I also had one failed business which was in advertising. I wanted to bring all of them together into one company like Berkshire Hathaway. That was one very big dream I always had. I have always believed in an institution rather than an individual.

There also came a point after investing for seven years in Nepal’s capital market and running my startups, I realised my level of intellect was not growing and I was not able to fully research a lot of things. Research, company analysis, industry analysis, studying the economy, studying the stock market, all these are very important before we make any investment and I couldn’t take care of all those aspects all by myself. Therefore, I decided to create a company and opening one has its own hassles but I thought I could hire people and combined we could learn more and grow more. Having a team, I feel is so essential in all spheres of life. Moreover, people will recognise and trust an institution rather than an individual, and institutions stay there for a long time even after your death. You will be leaving behind a legacy. For example, Apple is still running even without Steve Jobs. Maybe you are interviewing me because I own iCapital, which is an institution. If I was just an individual investor, that impact would not have been there. I might have grown my wealth but then there wouldn’t be a platform where others could come and grow. There are many examples of us hiring a fresher who has trained with us and gone on to do bigger things in life like opening their own investment company or working in the World Bank. A company is able to create that opportunity for others too and I believe it is a service to the nation.

I have the knowledge and through the company, I build a platform to transfer my knowledge and when that knowledge gets transferred it has a multiplier effect on the economy. It may look small but it is these small contributions that in the long run help the economy of the nation. Moreover, we also pay our taxes to the government.

Another reason why I wanted to open an investment company was due to the fact that there weren’t any such professionally run institutions. When I wanted to open iCapital I looked up on the internet and was able to find only a couple of such companies but when I visited their websites, they didn’t have any information on who owned it or what they actually did. So, I thought I could open an investment firm and create that culture of transparency in Nepal. In the last ten years, we have developed a very professional culture whereby we have mentioned all the companies we have invested in and our asset size on our website. Everything we do here is transparent.

It sounds rather funny now, but when I started iCapital I went to a few people and asked if they wanted to invest in my company but no one wanted to do so. They didn’t believe that an investment company could do well. So, creating that culture where people would trust us was very important for me.

When making investments whether it be in real estate or shares, what are the factors that you advise people to look into?

There are two ways to go about it – either investment comes to us or we go to companies. For example, I can come and ask if you need investment in your company or you come to me and ask if I would like to invest in your company. It could be both ways but, in both cases, there has to be a written investment plan. A lot of individual investors do not have that plan; they do not have the time to do that. Whereas when we make investments, we always have an investment plan of how we get into the company and what are the things we need to look out for. Over the last ten years, we have developed processes and we have an entire guideline to analyse a company. In fact, we actually have an entire guideline to analyse a hydropower company, we have a checklist to check business models of other sectors too. There is this entire process which we could call due diligence and that I think is our asset. It could be the same company but my analysis and your analysis could be completely different and access to information will be completely different and analysing the information we have access to will also be completely different. The edge that we investment companies have over individual investors is in the way we analyse companies.

For instance, a company might say the value of its share is Rs 400 but it might actually be Rs 800 because they do not know. This is the kind of edge we create. So, we do the due diligence and there are all these legal systems we follow to get into the company. If it is investing in stocks of a particular company, then we analyse their business and management. We do their valuation and also look at their products and services. There is a long list of questions which needs to be answered. Even when we are buying real estate there are many aspects, we look into like local budget analysis, the local government, and checking at the land survey department and the land revenue office. While investing in businesses it is similar to how we analyse the stocks. The other crucial factor is we document all the processes of our investments and we analyse if that rationale holds true or not. If it is going towards the direction we are expecting, we keep the investment or else we exit. We follow a very disciplined system and the monitoring system we have is also robust. Even the entry and exit rationales are all documented. Nothing that we do is done without rationale.

We conduct all the research and analysis ourselves. We never consult with anyone regarding our investments. It is all independent systems and research and it is process driven. We never ask anybody on how a company is performing. If I talk to anybody about any investment there are chances of me getting influenced. We work based on what our financial analysis says, what our research says. Hence, all our investments are based on our independent study.

What does value investment entail?

Value investment is something only a very few people can do, and actually do. It requires a lot of discipline and patience. You have to have the courage to say no because many people might come to you for investments but oftentimes you need to say no. A lot of investments look very tempting but one has to be very careful about their investments. So, value investment is calculating the intrinsic value of a company. Intrinsic value is basically the real value of the company, the value that lies within the company which sometimes the owner does not see. If we get a deal that is below the intrinsic value, then we take it. That is value investing and the difference between the intrinsic value and the deal that we are getting is called margin of safety. That is the core of value investing.

How do you view the capital market development in the country?

The domestic capital market has changed a lot in the last 20 years. When I first started it was all paper-based and there was an ‘open out-cry’ system whereby people used to go to the NEPSE office in Singha Durbar and you could see brokers shouting. Everything was paper-based and it took a long time to trade. We had to verify signatures and bring them to the broker’s office and then the broker would sell the shares and it literally took six to eight months to transfer the shares. Now all that is done in four days. Previously, the entire trade cycle was so long, it was crazy. That has changed now, especially after the introduction of LAN (local area network) trading. These days you might see a crowd in the broker’s office and the broker places orders through the computer system. Another major change happened when DEMAT was introduced. All the physical shares we previously had are now dematerialised. The development of online payment system is also happening. I won’t say we have achieved everything because we have a long way to go like there are a lot of instruments that need to come like derivate products, option products, index trading and a lot of sectors are missing in the stock market. The stock market in Nepal mostly consists of banks and financial institutions and insurance firms. New sectors need to come in and I think it will take a few more years for that to happen. What I can say is that the capital market will only grow bigger and bigger and more households will come into the system. That is how it works globally. It will only keep growing because capital is something that is always scarce and always required by any entrepreneur.

A long time back my thought process was I need to invest in the stock market but which shares do I buy. Now, it has changed and I ask myself if it is good to invest in the stock market. Most people have the approach which I had in my early years of investing. These days I ask myself whether it is a good time to invest in stocks. Is it a good time to invest in real estate? Is it a good time to invest in this or that sector? My approach to investments has changed. If you ask me for the moment, I wouldn’t get into the stock market now. Even though the macroeconomy looks good I wouldn’t get into the stock market because I have other options now. Many investors might not have that option for now.

When I need to invest in stocks, I will check my soource of capital. Where is it coming from? Is it my savings or is it through debt by pledging my land or is it a portion of my savings or have I inherited that wealth? So, the question is where is the source of capital coming from because if you are investing in shares through loans then you need to finance that debt too every year. The investment should at least give you the money to pay back the interests. You can’t take a loan and invest long-term in a non-cash-generating stock. It all depends on where your capital is coming from and what your investment objective is. You also need to be sure of your return target.

There are a couple of crucial questions you need to ask yourself before investing in stocks. However, 90% of the investors never make an investment plan and 99% never make an exit plan. We Nepalis never seem to make an exit plan, we are a bit greedy I would say. If the share price reaches Rs 800, we will wait for it to reach Rs 900 and so on. And then one fine day it crashes back to Rs 400 and then we start panicking and may be sell at a loss. This is a result of not having an investment plan basically. Investment plan includes an entry plan, exit plan, and holding plan. You have to look at the economic indicators too. If they are not good, I will sell my shares or if remittance growth slows down, I will sell. Or if interest rate hikes to more than 13% I will sell but if it is below 10%, I will hold on. A plan could be anything like let’s say if my share grows by 15%, I will cash out or if my share drops 5%, I will cash out. So first I would approach with a plan. And plan comes from the source of capital. It could be a systematic investment plan also like I get a certain amount of salary and out of it I will invest a certain per cent in stocks every month for the next 20 years and I will not check either the losses or profits.

The second is which shares should I buy. The first I talked was about the investment plan and strategy and now it is about the individual stocks. Stock selection depends on the strategy basically. Maybe you want to beat the fixed deposit rate then you invest in shares that have more cash yield. If you are looking for capital gain, then you invest in shares that have low paid-up capital or low-price earnings. If you are looking for safe investment, then invest in companies with regular growing income and professional management. If you don’t care about other things and you have a lot of cash and are not looking for any opportunity cost, then you can just invest in a good company and forget about it; just check every year whether that company is doing well or not. What Warren Buffett says is invest in the business that you understand. For instance, a long time back one of my friends who is based abroad kept asking me to invest in Bitcoins. First of all, I can’t invest in Bitcoins from Nepal legally and then I also told him that I don’t understand blockchain technology. I don’t know how it operates. Investing in something that I do not understand is basically gambling or speculation. There is a difference between investment and speculation. Investing without understanding is speculation.

When we invest in a company, we have to understand that we have fractional ownership in that company. We meet many people who say they have bought shares of let’s say, Standard Chartered Bank Nepal. No. You have actually bought a fraction of a bank that is a foreign-based bank with operations in Nepal for the last 25 years with decent earnings. They are great in trade finance and they have a lot of money in their current account on which they do not have to pay a lot of interest. They also have one of the lowest costs of fund in the industry and their interest rate is still in the single digit. So, you have to study and understand these things. You are basically owning a business when you buy its shares. The crux is that if you understand something you will have more confidence. If you approach stocks in that manner then you will have a sound sleep. My philosophy is you need to sleep well after making an investment. If you have sleepless nights, then it means you are not sure about your investment. The investment should be such that you actually forget about it, checking the price every day is not required.

When you are creating a portfolio, you can buy one stock from each industry; it is like having exposure in all the sectors. That means if the index grows your portfolio also grows. So, you could pick one good company from all the sub-indices. If you are less confident then own two companies from each sector. Or you could invest in a mutual fund that has invested in 50 to 60 companies. That is like nearing the index. Even Warren Buffett says you can’t beat the market. Usually, the index is winning the game. If you look at some investment legends, you will notice that they invest in the entire index. They are bringing in NEPSE 30 index. I think you can buy the entire index by buying the NEPSE 30 index. That can be done in some developed markets and these things are gradually coming into Nepal. The stock market in the long run always goes up. For two to three years there may be fluctuations but it will always be on an upward trend. So, you will not have to worry until the country is doing good. You will have to worry about the stock market only if there is a civil war. Unless we turn into a country like Zimbabwe or Pakistan the stock market will always be on the rise. Even in Pakistan after they got the IMF loan their stock market is rising. So, if you focus on the ups and downs then there are high chances you will lose money. For me, the best strategy is to keep the stocks for a very long time.

If you have great confidence in particular stocks, then you can just own two or three stocks. If you look at it closely, then all the wealth that is created in the world is by investing in one or two companies. Even Warren Buffett owns only one stock and that is of Berkshire Hathaway. Even Bill Gates only owns Microsoft. That is having too much confidence because they run the business themselves. They are active investors. Usually, we are passive investors because we invest in companies being run by others. If you have a lot of confidence, then I would say concentrate on only one or two stocks. So, from 12 sectors bring it down to five and if you have more confidence then bring it down to one. However, if it does not do well then it is gone. Investing in many stocks could save your investment but concentration makes you rich. So, investment plans and strategies and picking up the stocks based on the understanding of the business are vital. And to concentrate in one or two companies you need a very good intel of those companies.

Private equity is pretty new to the country but we see many such funds being opened in Nepal, what is their viability?

What you have to understand is that the interest on loans is high but giving up your equity is even costlier actually. In Nepal, we say interest on loans are high when it is 15% but for private equity, you are giving up shares in your company and shares in the company are the most expensive thing you can give up. If you look from that perspective, private equity (PE) is a very costly way to get the money actually. And then it comes with control also. If you take a loan from a bank the bank people will not come into your board. They will literally ask you for nothing except for collateral and to furnish your EMI every month. However, when you get funds through private equity, they will control you. They will come into your board and try to influence you. What one has to realise is that they do not have collateral security so they want to make sure their investment is safe. There will be strings attached. Here, I am talking from the entrepreneur’s perspective.

From the PE fund perspective, there are a lot of funds in the pipeline but very few have raised investments. Most of them are in the forming stage. If there are a lot of PE funds, then entrepreneurs will have a good time. They will get good valuation for their company because there will be a lot of competition between the funds. As an entrepreneur, I could come to your fund and say my valuation is so much and then I could go to another and say this other fund is valuing me for so much. So, entrepreneurs will have a lot of bargaining power. However, in Nepal, we still do not have many investable companies. Let’s remove hydropower from the equation and you will see there are not many other investable companies. Investable means they should be compliant with everything like all their audits, all their books should be clean. When there are less investable companies in the market, then PE funds will start suffering from deployment pressure. A private equity fund will have let’s say 7 to 10-year period to raise funds, invest those funds and also exit within that period. In the first two to three years there will be deployment pressure and in the last two years there will be exit pressure. From the PE fund perspective, when you have deployment pressure you end up paying higher valuation. So, these PE funds might have shortage of good deals in the market.

This is something I always fear – when somebody starts something new everybody jumps into that bandwagon. You could look at the carpet industry for example or the pashmina industry. It is like a herd type of mentality. So private equity also might suffer from that. That’s why I say even though I run an investment fund, rather than running a PE fund I would rather run a company and be an entrepreneur for the next few years because I might be able to raise money in good valuations from the private equity fund itself.

The way it is going is good and regulations have already been introduced like the Specialised Investment Fund Regulation, 2075 (2019). There is a direction at least for such purposes. We still do not have many exits to prove that these PE funds might make money. It might be challenging for them and since PE funds have individual investors and bank investors at the moment there might be a lot of conflict-of-interest situations. But I think in the next ten years it will really grow. If the government creates a very good room to bring foreign funds into Nepal it might really boost our economy.

The government does not have capital to invest and the CD ratio of banks is now down to 80 and once it starts lending it might go up to 90 and they might have less loanable funds. It is a very funny situation that banks are taking loans. Sometimes I find it very surprising that they take loans and have a big signing ceremony and I ask myself what is so charming in banks taking loans because they are supposed to give loans. We need foreign funds coming into Nepal and investing in companies that the banks or even some of the businesses do not invest in. So, there is this appetite that needs to be filled and foreign funds could play a big role here.

There is also something called venture capital fund which I find more interesting. There are different types of funds. Venture capital is more of a seed stage, the early-stage funding. Private equity is more in the mature stage, like Buddha Air has PE capital and WorldLink also took PE capital a few months ago. These are all established, matured companies and looking for further growth. Venture capital is in early stage and there is a risk of losing your money because a company can shut down later on. There is also a concept of angel investment which is like the name denotes. So, let’s say I have an idea and somebody invests in that idea helping it kickstart things, that’s angel investing. There is also hedge fund which is riskier. One of the companies I run, Alpha Capital, is more of a hedge fund. We invest in stocks, land, and real estate property and businesses. You have to have more risk appetite for this. 

How do you view the real estate market?

The real estate market is in a period of correction at the moment. People have started realising that the cost may be high and every time people realise, it corrects a bit. All this asset buying is basically fuelled by debt and it is all speculation based at the moment. The formal and informal economy all come and get linked in real estate and due to that prices have increased. What I say is most of the trouble in the country’s economy is linked to real estate.

I was recently with a group of engineers and talking about the building code with them. There are so many restrictions in the code that the cost of building the structure gets very high and the builders will also have very less space. Every time we make an investment, we need returns on our loans and investments. Since the price I lease out my space at is high, any business setting up office in my building will have a higher operation cost. And where does this get passed on to, it is obviously to the consumer. A ripple effect is being created in the market. Even in buildings that are well inside the main roads charge nearly Rs 100 per square foot. When rents are high it will have a negative impact. Now add to the real estate price being high and it compounds the problem. This will hamper the country’s economy.

However, when it comes to residential real estate then even if there is price correction there will be demand. Real estate has this fundamental value. There is limited supply but there is growing demand which means there is always this equation where there is never any extra supply. Due to the demand-supply concept also it will hold on. That is the reason why prices of residential land have always been rising from our grandfather’s days. That is one fundamental. The other reason is every Nepali wants to own a land and a house. This is usually the lifelong dream of every Nepali. People just don’t seem to want to own an apartment. So due to this social aspect there will always be demand for residential land. That is why price of residential real estate will always go up. Even now there isn’t much correction for residential land.

Prices of land that was purchased for speculative purposes have gone down which we can see in the plotting that has been done in quite far off places. The vertical living concept will soon happen in Nepal and we need to do that because horizontal growth is now not possible. That is why you will see gradually a lot of apartment projects are coming up.

Commercial real estate, I think will not grow for the next couple of years. It has taken a big bashing. Many commercial spaces are empty right now and it will take some more years for those spaces to be fully occupied. It all boils down to rental issues. Paying Rs 800 for each square foot! Who is going to pay that amount at present? My prediction is commercial real estate will take many years to grow but residential and apartments will grow. One reason why plotting land will also go down is people have become more selective of their investments.

How do you view the economy at present?

Economy basically, I feel, is sentiments. If it is doing well, you start investing and opening businesses. The whole psychology is grounded right now. It will take some time. If the macroeconomic indicators improve, which have improved in the last few months then it will be on an upward trajectory. A lot of things will depend on the Monetary Policy also which will be announced soon. Investments are happening slowly. Markets are bouncing back gradually and it will take some more months.

The budget target I think is still high. Having 15% credit growth is actually very challenging and without 15% to 20% credit growth the overall growth target is not achievable. Fifteen percent growth in credit means the CD ratio of banks will be above 100. That is not going to happen because deposit creation will take time. It is all a recovery part and this will take time I believe. Now people will be cautious with a lot of things. And one or two policy changes if not done well might take us to the same path again. Let’s say the import restriction. I think it should continue for some time unless we find an alternative.

Nepal’s economy is very troublesome. You want to fix one indicator and another indicator gets messed up. Then you try to fix that indicator and another gets messed up. For instance, we control imports then revenue gets messed up. Long-term fix is still very challenging. What is happening right now are short-term fixes. Liquidity problem keeps coming and going. In 2010, there was a problem and then again in 2013. In 2016 also we had a problem and now also we are having a problem. This problem has been recurring. And every time, you can’t just restrict imports. I had a very high hope on the government that they would do something radical but nothing as such happened. They are back to the same old things and if this continues then what happened in the past will continue happening. And what International Monetary Fund is doing is putting all these restrictions like working capital guidelines. These are reforms that IMF wants or they will stop the funds. I think NRB should think that way.

My point is that if the economy survives then we survive. Whether an individual or a company, if the economy survives then we survive. So even if we get hit in the short term but if it is going to fix the problem long-term then I think we should go for it. Our private sector also does not have patience. If anything happens, they start protesting. That’s why I always tell them why not find a long-term fix. If the economy suffers for a couple of years, it is okay. Let us think of the 1997 Asian financial crisis. The countries that were hit took some stringent measures and they are stronger now. The currency exchange rate of some of those countries with ours was 1:2 and now it is about to be 1:4. When we take major steps there will be a setback for a couple of years but we need to plan for the long term.

Moreover, we have a currency peg with India and till the peg is there, we have to keep a close eye on the Indian economy. We cannot make our economic policies in isolation because we are not a free-floating currency. The peg has been revised seven times in the past, I think. If the Indian economy does good, our currency becomes stronger. The money that we are making is actually losing value. If I need to go abroad for a vacation, I need more money now because foreign currencies have appreciated vis-à-vis ours. Our currency is losing ground. The government should find a way to protect our currency because we are an importing country. But I don’t think the government has any plan to strengthen our currency. All Nepal Rastra Bank talks about is repo, reverse repo, monetary policy, and directives. They don’t have any plan to strengthen our currency. Right now they are talking about CBDC, central bank digital currency. A lot of things can be done in a very creative way and there should be a discourse. NRB cannot function in isolation. There are a lot of good brains outside NRB, or outside the Finance Ministry or outside the government who may have fantastic ideas. So a mechanism should be developed to incorporate these ideas. We never know when somebody not working directly with the concerned authorities could bring in fantastic ideas

Personally, I am optimistic about the economy. There is no doubt that the economy is also a cycle like the stock market. If the government can find a way to extract only 1% of the economy or the value of the economy from our neighbouring countries’ growing economy, we are set for good times. The government has to brainstorm and find a way to do it. Is financial sector stability the only goal of NRB? It could be if we look at the acts and all but there should be one or two interesting metrics that drive our economy. Like India is soon going to be the third largest economy but what’s in it for us? How can we extract value? These are some things we need to seriously look into.