Last week, three former Tata executives led by Mukund Rajan joined hands with Quantum Advisors’ Ajit Dayal to launch a $1-billion ESG (environment, social and governance) fund. Adopting a private equity kind of approach to public markets, they will look to invest $50 million each in 20-odd companies which seek to become better on their ESG practices and require help to do so, the duo tell Ranju Sarkar in an email interview.
Why an ESG fund? What kind of cos will you invest & on what basis (criteria) will you pick them?
Ajit: Many owners of capital, especially in developed markets, are concerned about the fact that their investments in economies and in companies may be supporting activities that are damaging to the environment or propping up governments which have laws and regulations that may not be in the larger interest of their citizens. Additionally, the pension and sovereign funds also believe that, while they take the same risk as other equity shareholders in a company, there are numerous cases where promoters or managements treat public capital as private fiefdoms. Given this disconnect between the owners of capital and the actions of companies in the ESG space, we wish to identify companies that seek to become better on their ESG practices and require help to do so.
Mukund: A pressing context is provided by environmental change – we are witnessing rising global concerns around the rapid pace of global warming, and India already ranks as the third largest greenhouse gas emitter. Meanwhile, a framework for sustainable development has been provided by the United Nations Sustainable Development Goals (SDGs), and the corporate sector needs to shoulder a significant part of the responsibility for meeting these goals. Yet, we see many cases of poor corporate governance in India, reflected for instance in a large number of cases before the Insolvency and Bankruptcy courts. There are also challenges of social justice, reflected in issues such as women's empowerment and the treatment of underprivileged sections of society including the Scheduled Castes and Scheduled Tribes. In an emerging market like India with limited resources and widespread poverty, therefore, the ESG theme becomes even more critical as compared to other countries.
The top 500 listed companies in India are already required to publish Business Responsibility Reports, and this number is likely to be increased via new rules. We see a mixed record on ESG performance of many of these companies, and with impending regulations to promote ESG standards in India based on international best practices, we believe there will be significant scope to work collaboratively with many companies to improve their ESG performance. There is considerable research across the world by reputed agencies that demonstrate the improvement in shareholder returns as well as value for other stakeholders when corporates improve their ESG performance, so we believe you can do well by doing good. Our fund provides us with the opportunity to be a key change agent and incentivise corporates to graduate up the ESG scale.
Quantum Advisors' Ajit Dayal
How are you similar to a private equity fund? (in terms of LPs, engagement) Is this unique for a public markets fund?
Mukund: We are delighted to be launching India’s first active engagement ESG fund. We will undertake detailed due diligence of the companies we might invest in, similar to any PE firm, and will sustain our engagement with the promoters, boards and management of the companies we invest in, again as PE firms do. We will also give sufficient time for our engagement and recommended initiatives to play out, as many PE firms do, before exercising the choice of exit. Our engagement will also have unique characteristics. It will be collaborative and will respect the unique situations of different companies, recognizing that there is no one size fits all solution. It will be undertaken by experienced corporate leaders who are deeply respectful of the skills and risk-taking capability of promoters.
Ajit: Yes, it is a unique approach: a typical public equity fund votes on the stock market; they run with their feet away from - or towards - the company and its listed stock by selling or buying. A typical public equities fund has a limited engagement. However, our fund will have “active engagement” with promoters, boards and management who wish to improve upon their ESG practices and thereby be rewarded by the stock market for running more sustainable businesses.
How is the market for fund-raising? By when do you expect to make the first and the final close?
Ajit: Though there are concerns of various kinds in the world, ranging from Brexit to a slowing US economy, to the impact of the US-China trade war, to the outcome of the next general election India, there is also growing concern around the factors of ESG - so that will help us. ESG investing is one of the fastest growing equity approaches globally, with over $20 Trillion now invested behind it. There is strong and growing research evidence that ESG investment and good returns correlate.
In India, the recent bankruptcies and corporate thefts suggest that governance is especially a big problem. If we need capital to grow the economy, we need local investors to have more faith in the promoters and management of listed companies, and we need foreign investors to be more confident that the companies they invest in will follow global norms on ESG. Our investors will typically be seeking to deploy capital behind ESG strategies and so far they have not had the opportunity to do so in India. We believe that the opportunity for investing along ESG lines in India is compelling and the narrative will be appreciated by long-term investors.
Mukund: We will target the first close in the second half of this calendar year and hope to close the fund within the coming fiscal year.
What is your combined track record in terms of funds raised /managed and returned, exits made?
Ajit: Quantum Advisors manages over USD 2 billion in the Indian stock market. Its 100% subsidiary is the Quantum AMC which manages the Quantum Long Term Equity Value Fund (QLTEVF) whose track record is in the public domain. QLTEVF has given a return of about 13.5% per annum compounded, after all expenses and fees, since its inception in March 2006 nearly 13 years ago. It is classified as a “value” fund and invests in more established companies listed on the stock exchanges in India. QLTEVF adopts what is called a bottom-up, long term approach to investing. It is important to note that QLTEVF has not used any formal ESG framework to invest so the record cannot be used in any way to suggest what may happen with the proposed ESG fund.
Mukund: While Quantum Advisors has a reputation as a seasoned investment manager, my colleagues and I, who include former senior leaders from India's largest corporate house, the Tata group, have - both individually and in projects we have worked together on - been responsible for multiple investment and divestment decisions and discharged capital allocation responsibilities worth many billions of dollars, across diverse businesses ranging from telecoms to aviation to financial services to auto retail and many more. We have faced the pressures of delivering to the expectations of the public markets and understand the complexities of running large companies. Our team includes ESG experts who understand the ESG investing space, and we are forming an eminent advisory board with a strong commitment to the UN SDGs and with deep connects to the corporate world and the public policy space. With both partners’ deep and practical understanding of capital allocation, we are uniquely qualified to deliver the promise of an active engagement style of public markets investing in the ESG space.
Isn't $1 billion too big a fund for a niche like ESG and for GPs/ team who have not worked together?
Mukund: ESG investing is a well-established proposition in all developed markets. While it is new in India, we expect the amount of capital backing ESG strategies in the country will rapidly multiply, partly driven by specific mandates from institutional investors overseas. Given the need outlined earlier for improvement in the ESG performance of Indian companies, we expect far larger sums to be deployed within India over the next few years and are excited to be partnering with Quantum to create this pioneering fund for the Indian market.
Several of us are ex-Tata and have worked together for many years. Likewise, the Quantum team are led by Ajit and Subbu who have worked together in Quantum Advisors for over 22 years. Our partnership is predicated on a common ethical framework and the desire to build an institution that can be a catalyst for change while giving returns. Our skill sets are complementary - Quantum has the investment and portfolio management skills, while the rest of us have built and worked in companies.
Ajit: We believe we have the capacity to sensibly deploy USD 1 billion behind ESG strategies of companies. If one assumes that the typical company we invest in will have a market cap of at least USD 500 million and we invest up to 10% in such a company, then this translates into an investment of USD 50 million per company. We expect to easily find and actively engage with and help at least 20 companies whose promoters, boards and management are aligned with our thinking on improving ESG performance. So, yes, our “capacity” will be USD 1 billion and the fund size matches that estimation. Indeed, with a few thousand listed companies in India, and the growing focus on ESG, there will be significant room to deploy much more capital. But this is a start. It is a new idea and we are confident that the owners of long-term capital who wish to generate returns on their investments while doing good will see the opportunity that this initiative provides them.