First Water Capital Equity Fund

Fund Snapshot

Fund Overview

We are a regulated public-equity fund that is bullish on India.

Armed with a strong track record of investing in the Indian equity markets.

The Fund’s Investment Advisors are not new to investing and have a strong track record that has been reviewed by a Big Four firm (Appendix A) over a 15-year period; and
The review illustrates how our lead advisor, Ricky Kirpalani, took a pool of capital from INR 15.4 Cr to INR 1,129 Cr from 2002 to 2017. This is a INR CAGR of c. 33% and a a multiple of 73 times during this period.

First Water itself has been one of the leading AIF Cat 3 funds in India for much of 2022 till 2024, as per PMS AIF World.

Skin in the game.

We believe in our methodology and are co-investing a significant amount as skin in the game. The partners have invested over 7 crores in both the AIF schemes combined.

Clear understanding and demonstrated experience of the benefits of investing in a concentrated fund to Institutions and the UHNWI.

Investment Philosophy

The investment philosophy centers primarily on a long only strategy, with a value driven and concentrated portfolio approach.
The focus is on intrinsic value maximization at a portfolio level rather than just market value of individual names. In order to enhance returns, we will regularly review the relative, risk-reward of each stock and redeploy capital over the fund life.
Our philosophy is governed by our belief that market values shall converge to intrinsic values over a period of time.
Our preferred investment time frame is around 5-7 years in order to allow our investment decisions to play out.
While we are unable to time the short and medium movements of the market, we suggest that the funds are staggered over a period of time but accelerated in a down cycle (Appendix B). It is at this point that the value difference between intrinsic and market becomes more pronounced.
Our focus is India, which is an economy that we believe has a long way to go.

Key Factors

• High real barriers to entry
• ‘Out of favor’ and overlooked businesses, including cyclical plays
• Significant gap between market value (market price) and our assessment of intrinsic value
• Diversified businesses, mispricing sum of parts

Investment Risks

• Market Timing – Our strategy involves investing in ‘out of flavor’ names which we believe have much higher intrinsic value than extrinsic/ market value; however, this rerating typically occurs over a period of time that is difficult to predict. If investors end up deploying money for shorter time frames than advised, they may not see opportune returns. Hence the suggestion to invest on a periodic basis.
• Volatility Risk – Our strategy is focused on small and mid caps rather than large caps; these are typically high beta stocks and pose greater volatility risk to the portfolio. However, it is our belief that greater value is to be found in this strata.
• Start-up Risk – This is a start up fund and there is an inherent risk in this regard; however, the team has a significant track record / experience in Indian markets. The team members have worked for blue chip companies such as Lloyds Bank, EY, PWC and Motilal Oswal. Most support functions have been outsourced to blue chip organizations so that the core team can focus on creating yield.
• Liquidity Risk – The markets have been largely liquidity driven for the last year or so, while corporate earnings have yet to validate this rise. A slowdown/reversal in liquidity flows could trigger a correction in markets, impacting portfolio return.
• Currency Risk– Investing in emerging markets and high growth economies usually means that there is a risk of currency depreciation.

Why India

India is experiencing several tailwinds that are likely to herald in its Golden Decade

• A key beneficiary of China +1: The trade wars along with the supply chain disruption caused by Covid, has led manufacturers to look at other low-cost manufacturing countries with large domestic demand; as demonstrated by Apple.
• Minus-China: China itself is voluntarily looking to reduce capacity in several industries which are polluting, capacity excess or where it no longer has cost advantages due to its higher wage structure.
• Digitization: In 2015, India was 155th in mobile internet access out of 250 countries. Today it stands in the top 2 consumers of mobile data. This has allowed the country to leapfrog traditional infra and take advantage of fintech, e-commerce, mobile healthcare and education.
• Per capita catch-up: One of the lowest levels of per capita consumption for a number of products amongst developing economies such as steel and packaging. India’s current usage of steel per capita is 76kg a year with the world average standing at 233kg.
• Favorable demographics with one of the highest percentage of potentially, productive work force in the world. With an overall population of 1.3bn and with an average age of 29.
• Continued shift of consumption trends from necessities to discretionary, even aspirational spending as the middle class grows. GDP per capita is expected to grow from USD 2,400 (IMF) to c. USD 5,000 in 2030. While those earning over USD 35,000 will increase by 5x in the coming decade.

Advantage India

• • Expected to become the world’s 3rd largest economy; USD 5 trillion economy by 2027
  • One of the fastest growing, large economies; 6-8% in the near-term.
  • One of the more stable currencies among emerging markets.