@ SYNAPSE 2017 of Department of Management Studies, Pondicherry University
Good afternoon everyone!
It is indeed a great pleasure to be here today! I would like to first thank the SYNAPSE 2017 team and Prof. B. Charumathi in particular, for the personal invitation she extended to me to be a part of today’s event!
When I received the invitation call, I was little reluctant at first as I was not sure if I would be able to do justice to the topic for the Finance Panel today – “Finnovate, Fintech and Finruption”. I thought maybe the topic was more apt for someone from the tech space to comment-on rather than an investment professional like me.
However, after listening-in to the earlier sessions and my co-panellists here, I am glad I finally relented, as I would have otherwise missed out on an opportunity to a part of this wonderful event!
I would like to cover the following 3 broad topics during the course of my talk today:
- A brief overview of the Private Equity (PE) industry and my firm (Pragnya Group) – in case some of you are interesting in pursuing a career in the PE industry.
- Finnovate, Fintech and Finruption – a personal take on the innovations and disruptions in the finance industry and the potential / challenges it entails for an MBA graduate.
- Lastly, as someone who left campus not too long ago, some of my personal experiences / takeaways.
Private Equity Industry
Private Equity (PE) typically refers to investment firms who raise capital from HNIs, family offices, large institutional investors, university endowments, etc (generally referred to as “Limited Partners”) and invest in companies / businesses to generate relatively higher returns.
PE firms can be classified into different categories based on several factors. Some of the common parameters on which PE firms are typically differentiated are –
- Stage of Investment – This is the most common parameter for differentiating PE firms: Venture Capital – which invest in early stage companies or start-ups; Growth Equity – which comes next and invest in slightly later-stage companies with usually proven concepts, robust top-line and mainly looking to grow operations; and then, there are Buy-outs and distressed investing – which comes last and typically represents investments in mature companies with focus on using an ideal capital structure rather than operational improvement.
- Target Geography – There are country-specific funds which focus on a specific country or regional funds which focus on a few countries or a region. One prevalent distinction based on target geography is between funds that invest in emerging markets (China, India, Brazil, etc) v/s funds that target developed markets (US, UK, etc). This distinction has been blurred over the years with most of the large international PE funds which initially focused only on developed markets now simultaneously allocating a portion of their corpus for emerging market strategies.
- Fund’s Target Sector – The range here varies from funds which specialize in one specific sector (say – technology, real estate, healthcare or financial services, etc) to sector-agnostic funds which invest across sectors.
The PE industry remains one of the most sought-after career options for MBA graduates – particularly for those with a specialisation in finance. The work profile in the initial years which ranges from market research, sourcing deals, financial analysis of potential investments, due-diligence, investor relations as well as involvement in the management / operations of the portfolio companies offers an MBA graduate a wide range of opportunities to learn and grow.
A longer term stint with a PE firm can also offer one an opportunity to participate in what is referred to as “carried interest” or “carry” – a share in the profit from investments.
To conclude with a brief overview of my firm (Pragnya Group) in the above backdrop of the PE industry: we are a real estate focused private equity firm with primary focus on real estate opportunities in the emerging markets of India, Sri Lanka and Africa. In India, we invest under the Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) platforms – in the form of equity and structured debt.
Innovations and Disruptions in the Finance Industry
Let me now move on to the next topic….
There is a lot of talk about Fintech and the innovations happening in the financial services industry. Given the current low penetration of banking and financial services in the country, the potential is indeed huge. My co-panelists have already provided a comprehensive overview of the latest innovations and disruptions in this space. Hence, I will focus more on other potential Fintech-led disruptions – particularly in terms of assessing “risk” which is a key factor for determining the price of any financial product or service.
Let’s start with the insurance industry. Many of us here would have gone through the experience of buying bike/car insurance. From having to go through the process of multiple calls with insurance agents, mis-selling, etc a few years back, one can today compare prices on platforms like policybazaar.com, coverfox.com, etc and secure the best deal – making insurance purchase much quicker and simpler.
However, there is still a long way to go. For example: if you look a little closer, you might still end up paying the same premium as someone who drives much more recklessly than you – as the premium is still based on some basic information like age, gender, type of car, history of accidents (Non-Claim bonus), etc.
This could be completely transformed by a set of connected devices which can provide data to assess an individual’s risk profile – how fast he drives, whether he makes hard turns, abrupt stops, how frequently does he drive, what time of day, location, etc. This could help in providing more accurate insurance pricing which will benefit both the insurance companies (better risk assessment and claims management) as well as the policyholders (potential savings on premium for responsible driving). It could also go a long way in encouraging responsible driving and reducing the menace of rash driving / drunken driving.
Similarly, health / life insurance can be completely transformed by wearable biometric sensors which can provide valuable data on the health profile, exercise habits, vital signs, etc and enable better assessment and underwriting of health risk.
Let’s take one more example: the pricing of capital itself – particularly, debt. Basic corporate finance teaches us that the cost of capital is a combination of a risk free expected return and a risk premium (Capital Asset Pricing Model or CAPM).
Today, the representative risk free rate is about 6-7% p. a. (G-Securities). However, the price of capital is typically close to or more than double of the risk free rate – i.e. a risk premium of over another 6-7% p.a. This is pretty high!
A significant portion of it can be attributed again to the inability to more accurately assess the risk profile of borrower. We currently have various Credit Information Companies like CIBIL, Equifax, etc which provide credit-related activity / information about individuals and companies. However, there is still a long way to go! Innovations in this front which allows lenders to better capture the financial risk profile of a borrower and enable them to charge a personalized risk premium would go a long way in providing an efficient and fair pricing of capital – thereby reducing the risk premium. Understandably, a significant improvement on this front would have to be supported by some regulatory and policy support relating to defaults and loan recovery.
These are just few examples where potential innovations to better assess risk can help in better pricing and delivery of financial services. The recent digitization efforts of the government, Jan Dhan Yojana, Aadhaar and the emergence of UPI provides a good foundation for further innovations in this space – with potential disruptions to existing business models while at the same time providing opportunities for new ones to emerge.
But what does the current “Fintech Fuzz” entail for an MBA graduate? The Fintech revolution is supported by three key pillars. First – the government or regulatory bodies to enable innovative financial services and products to be introduced to the market in an efficient way through a flexible regulatory framework. Second – innovators or entrepreneurs to cause disruptions and bring about new business models to leverage technology. Lastly – the capital providers or venture capitalists to provide growth capital to the Fintech start-ups and firms.
An MBA graduate can play a role in any of the above three spaces – particularly, as innovators / entrepreneurs and providers / arrangers of growth capital.
As someone who also graduated from a B-school not too many years back, I would like to leave behind one/two personal experiences – hoping some of you may find it relevant or maybe, even useful!
Like most engineers who ended up pursuing an MBA degree, I too joined the bandwagon as I felt the need to outgrow a niche and jump-start a new career. And I believe many of you are also here for very similar reasons.
No doubt, the MBA programme is one of the best platforms. However, for those looking for a ‘career-restart‘, it is critical to clearly identify a sector or specialisation to fully leverage this one-time opportunity. And this should be done based on an honest assessment of one’s interests and strengths. This is critical because the MBA programme also comes with lots of ‘peer pressures‘ and ‘placement pressures‘ and it’s not so easy not be swayed or succumb to these pressures.
I belong to 2009 batch at IIM-B and we graduated at the peak of the Subprime Crisis (Infact, we still proudly refer to ourselves as the Recession Batch!). With the financial sector in a complete meltdown, job offers from the sector were hard to come by. It was, therefore, very tempting to apply and take up more lucrative offers in other sectors / specialisations. In the end, my decision to stick with finance landed me at the corporation finance department of SEBI. However, as the markets improved a year or two later, I was able to secure offers to shift to various hard-core finance opportunities that I was initially looking for.
Looking back today, I believe it would have been much harder to make the shift had I chosen a completely different sector in the final placements and I might have landed up in a completely different career path from the one that I have today.
Hence, I would strongly recommend clearly identifying and sticking to one’s choice of a career path and consciously and effectively leverage this opportunity for a fresh start / re-start!
The second experience I would like to leave behind is about ‘networking‘.
I have realized over the years that one of most underrated takeaways from an engineering or MBA degree is the handy network of batchmates and alumni.
The easy access to this chauvinistic tribe who are always more than willing to lend an ear or a helping hand to a fellow brethren comes in very handy when looking for a career / job change or establishing business relationships. Ofcourse, it becomes even more important if you are looking to grow your own business!
Like everything worthwhile, this needs to be consciously built and there is no better place and time to start than while you are in the campus. You can start with your own colleagues, immediate seniors / juniors in college, alumni and eventually to senior professionals in the corporates – particularly in your fields of interest.
No matter what you end up pursuing, you always have a much better chance of success if you are better net-worked.
Thank you once again for this opportunity and my best wishes to all!!