Series 23 – Business Evaluation Process – The exit

Over the past few weeks, we have extensively covered the different phases of our business evaluation process: BUYING, EXPOSURE, ALLOCATION, and today, we’ll delve into the fourth and crucial stage, EXIT. Our investor portfolio typically consists of around 20 businesses at any given time. As a fund, we actively manage these investments, closely monitoring and analyzing management behaviour, on-the-ground execution, revenues, cash flows, earnings, ROCE (Return on Capital Employed) etc. With an average churn rate of 20%, we maintain an agile approach to optimize our portfolio based on thorough assessments.

So when do we look at EXITING a business? When we enter into investing in a business, we create a well-thought-out plan – “Thesis” explaining why we believe it’s a good investment. As we continue with the investment, we consistently review the management behaviour, company’s performance and financial results to see if they match what we expected based on our initial plan- “Thesis”. We also closely examine how well the company is executing its strategies and if it’s meeting its goals. This process ensures that our investment decisions are informed and guided by thorough analysis. 80% of our time, our analysts spend on studying the people behind the businesses and their capital allocation.

We EXIT our positions when-

1. Corporate Governance falls short of our expectation- Which means we are uncomfortable with the capital allocation decisions or any change in management. Example of one such exit is Nykaa, through October 2022.

2. Business where we have concerns on future growth and the valuations the market gave it against the same- Eg. Infosys, we exited during Aug – Nov 2022

3. Structural pricing power or edge the company has starts to falter- India Mart that we exited around Sep’2021

4. When we feel uncertain about the business’s valuation, we assess the most potential IRR based on optimistic growth rates. If the projected IRR is only in high single digits, we consider an exit. – Example is ICICI Bank earlier in the year

The decision to exit is a critical aspect of our portfolio management strategy, allowing us to reallocate resources and seize new opportunities to achieve our investment goals effectively.

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