Want stable returns? What experts say on public and private markets offering better prospects

Fund managers Renuka Ramnath and Nilesh Shah offered different takes on what investor should do during a market downturn — seek access to private markets or hunt for distressed valuations in the public markets.

Speaking at Kotak Private’s 3rd edition of ‘Take and Counter Take’, the ace investors discussed public and private market strategies during market downturns. While the Ramnath stressed on the safety of directly managing cash and costs as a board member in a private company; Shah noted the unique wealth creation opportunity created by public market investors selling assets below fair value. However, both agreed investors should diversify, rather than treat markets as an either-or choice.

Ramnath is Founder, MD and CEO of Multiples Alternate Asset Management, and Shah is MD of Kotak Mahindra Asset Management Company (AMC).

Private markets are investments not traded on public exchanges. These include private equity (PE), venture capital (VC), private debt, and hedge funds, according to a Linqto report. Investors can gain exposure directly by purchasing shares in private companies or indirectly through private equity funds, it added.

What should investors do when asset bubble bursts?

According to Oisharya Das, CEO of Kotak Private Banking, growth of private markets is giving India’s wealth creators a broader opportunity set, while making portfolio-allocation decisions more nuanced.

On the optimal strategy during a market crash, Ramnath asserted that private markets offer a safe haven because investors retain active operational control. Rather than helplessly watching market capitalisation evaporate in the public sphere, private equity investors can utilise affirmative clauses to dictate cash usage, accelerate or defer initiatives, and actively steer the company through severe macroeconomic blows.

“In an asset bubble crash, it could be better to be in private market because you are in control, you know what you’re holding and you’re not nervous. When you’re a public market investor, you’re not sitting on the board, you’re not driving the strategy of the company. You don’t know what the levers are that those other than what they come out and talk to you. Whereas here we are sitting in the boardroom, we have many, many affirmative clauses in our document. We can decide how to use the cash in the company… We can decide what to accelerate, what to postpone, what to drop,” she stated.

On the opposite end, Shah argued that the immediate aftermath of a bubble is precisely when public markets offer unparalleled wealth creation. Reflecting on his years of experience, Shah noted how private company promoters may refrain from selling their businesses at a discount during crisis, public market investors typically tend to liquidate their portfolios even at lower prices.

“Post asset bubble, it makes sense to be in public market. I haven’t yet met a promoter who will come and sell his company cheap. But I can show you hundreds of investors who have sold their portfolio cheap,” Shah countered.

Risk premium in private equity: Look for THIS

Ramnath added that in private equity, outsized returns often require intense crisis management, adding that true value generation occurs when managers step in to shield companies from catastrophic internal and external events.

“Almost in every investment, you will face a blow that you could not have planned for. It could come internally from the company, or it could come from macroeconomic environment. So how we manage and steer our companies through terrible periods of massive impact coming internally or externally and making good the return is very important,” Ramnath explained.

Overall, despite their divergent crisis strategies, Ramnath and Shah agreed that investors must stop viewing public and private markets as an “either / or” proposition, stressing the importance of diversification across asset classes.

For investors transitioning from a purely public equity portfolio, Ramnath recommended scaling up alternate asset exposure gradually. She noted that over a five to seven-year horizon, an investor previously at 100% public equity could comfortably allocate up to 30% of their equity portfolio into the private market.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.