IIFL interviews Ricky Kirpalani of First Water

First Water

First Water

First Water’s run deep


This week’s guest columnist is Ricky Kirpalani, Lead Sponsor & Investment Advisor of First Water Capital Fund (AIF), a fund that invests in the Indian equity markets.

Prior to launching First Water Capital, Ricky was an independent business analyst and took a private pool of capital from USD 3.1m to USD 174m over a period of 15 years. This is a USD CAGR of 30.7% and a multiple of 55x.

So First Water Capital, that’s an interesting name, what does it mean?

Well, the term First Water was used a long time ago amongst merchants testing diamonds. The purest were called diamonds of the First Water. And that’s what we are looking to do, find the purity in finance.

What would you say is your approach and how have your evolved over the years?

I have always loved finance but developing an investment philosophy did not come immediately. To be a good investor, you need to learn both the art and the craft. The art comes through theory, but the craft comes through time and experience and learning how to deal with the markets.

At the essence of my philosophy is a combination of value and growth. To find a company whose intrinsic value is significantly greater than what the market is valuing it at is one thing, but it’s even better if there is an element of growth or a cyclical turn expected.

One has to exercise a high degree of patience. In the short term, the market is king, and it will wear you down till you doubt yourself. But over the long run, if you’re right and you have the conviction to hold onto your position, then that is where you can be rewarded.

I also tend to have a concentrated portfolio. Selecting 30-40 stocks may help diversify your risk, but it is unlikely to give you alpha, because how do you truly differ from the index if you have generally bought the index? By having a more concentrated portfolio, not only am I better able to understand the pulse of the companies I hold, but if one stock outperforms, it contributes more to the bottom line. Of course, if it doesn’t, then it has a greater negative impact. So, it’s a two-edged sword.

Another rule is that I invest in what I know, and I generally rule out what I don’t. For instance, I generally don’t look at pharma and tech, where I don’t have an edge. These may be great investment themes, but I’m never going to more knowledgeable on pharma and clinical trials then someone with a scientific background. Through this way, I quickly whittle away the investment universe to industries that I both understand and where no one has a significant understanding over me.

Tell us about the journey of First Water Capital

Until September 2018, I was primarily managing a personal pool of capital. But it was always my intention to institutionalise my methodology and develop a team that was capable of taking forward my philosophy.

Although we started during a broad market downcycle, it allowed us to average into stocks at relatively decent prices. Of course, along came corona in 2020, which caused the initial sharp decline, but also subsequently, the sharp rise in asset prices of which we have been a beneficiary.

Has the pandemic affected the growth of your business and how?

Growth can be seen in two ways. One is performance and the other is AUM growth. The pandemic has been a major booster to performance, due to the measures that were taken by various governments around the world from injecting liquidity to increased spending on infra. These measures have led to sharp increases in asset prices across the board.

Of course, in the light of increasing inflation, there is now signals from governments, especially the US, to start tapering. But this is par for the course, and we need to take it in our stride. We are also long-term investors, so while there maybe an impact on prices due to rebalancing of funds, we very much keep our eye on the intrinsic value of our companies, which even now, we believe holds good relative value.

Growing AUM is also a key part of building a fund, of course there are challenges with limited travel, fewer networking events, but we managed to continue building our book through existing and new clients. We believe 2022, geo-politics and Black Swans aside, should be a strong year as allocators look to new, exciting managers and themes.

What is your outlook on the financial industry?

Well, we believe that in India at least, the outlook is strong. To hone it down to the asset management industry, penetration levels in India are still relatively low, but this should improve as incomes grow and people are able to save more and look to make their money work.

There are a number of factors that should encourage people to redeploy away from hard assets such as gold and real estate into stocks, such as:

1. Greater awareness of it as an asset class along with a generational shift, especially triggered by the rush in 2020/21

2. Digitization;

3. Better regulation; and

4. Low savings rates.

We believe that India is at the beginning of its economic Golden Decade and picking good companies will be a way to be part of its wealth creation. We are also hopeful that the Government will continue to recognize the importance of the markets in providing capital to the nation’s building blocks.

The views expressed are the authors own. Please consult your financial advisor before making any investment decisions.


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