'The stock market collapse was once-in-a-lifetime opportunity to start business in India'
In March 2009, three friends -- all Wharton graduates with happening careers at US hedge fund and asset management companies -- planned to come back to India to realise their entrepreneurial dreams through the Indian financial markets.
Just six months earlier in September 2008 Lehman Brothers, one amongst a number of venerable investment banks, had collapsed because of the losses it had accrued betting on exotic financial investments. The aftershocks that followed drowned global financial markets in a sea of red.
In March 2009 that bloodbath reached its gruesome nadir. The Indian stock market's benchmark BSE 30 Sensex hit a low of 8,047 points after having scaled an all-time peak of 21,000 in January 2008.
Under these circumstances Radhika Gupta, Anant Jatia and Nalin Moniz decided to return to India and invest Rs 2 crore of their hard-earned money in starting a portfolio management system company in Mumbai.
It was not a blind bet, though. The troika were convinced the dark sentiments -- of a strong recession in the US -- would vapourise with time and the Indian stock markets would soon witness the euphoria witnessed in its heydays. The Indian economy was doing good growing at a nifty clip of 6.4 per cent even in the worst of global economic downturns.
Their confidence was vindicated. The BSE 30 jumped 2,000 points (17 per cent) May 8, 2009 as it became clear that the Congress-led United Progressive Alliance would soon form a government led once again by Dr Manmohan Singh. Overnight the sentiment changed.
Radhika, Anant and Nalin knew Forefront Capital Management, which they registered in India in May 2009, was in business. Interestingly, investors strongly appreciated their business idea and Forefront has managed to make profits in the first year despite having started their operation in turbulent times.
Work experience at Goldman Sachs and AQR Capital Management and the fact that the trio had earned double degrees in management, from Wharton School of the University of Pennsylvania, and computer science from the attached engineering school helped them.
While Anant and Nalin were born and brought up in Mumbai, Radhika being the daughter of a career diplomat had travelled around the world with her father, who is currently posted as India's ambassador to Denmark.
Radhika and Anant spoke to Prasanna D Zore about the impetus for their unusual start up that led them to switch countries and gamble on their futures. They also discuss what it takes to succeed.
What encouraged you to start Forefront? Where were you employed before starting Forefront?
Radhika: Nalin was a fund manager with Goldman Sachs Asset Management in New York. Anant and I were with a hedge fund called AQR Capital Management, a $ 20 billion asset management firm in Greenwich, Connecticut.
The three of us got together (they knew each other since they studied at Wharton) and said that we are doing quantitative investing (concept explained later in the interview) in the US but no one had come to India in a big way. We thought it was a very exciting business opportunity and so we decided to come to India and start the company last year.
When was the idea mooted? You were working at different places?
Anant: The idea came about in early 2009 -- that's when all three of us had decided to move back to India -- when we thought of starting a quantitative fund in India.
Radhika: And the market then was at an all-time low in May 2009 and we thought this was a great, once-in-a-lifetime, opportunity and it made sense to move back to India.
Click NEXT to read why the trio chose India for their enterprise.
Image: From Left: Anant Jatia, Radhika Gupta and Nalin Moniz
'The greatest opportunities are always found in crises'
Normally, it is the other way round. When the markets soar people jump on to the bandwagon. What made you bet otherwise?
Radhika: The greatest opportunities are always found in crises. For us we are long-term bullish on India and its economy. Then it makes sense to jump in even when there is a big crisis. We always had confidence in Indian economy's resilience to come out of this crisis (the world believed that the US will sink into a long-drawn recession affecting the global economy including India's).
Anant: We were pretty convinced that the Indian markets would rebound and rebound very quickly. And we thought that if we have our operations up and running even as the Indian economy slowly emerged from the post Lehman Brothers global shock then we could take advantage of an upswing whenever it would occur.
Why did you quit your lucrative jobs and dive into an uncertain business that too in a country where fancy concepts like quantitative investing had yet to catch on?
Radhika: We all were very happy with what we were doing at our respective companies. But there is tremendous joy in doing something on your own and tremendous joy in coming back to your own country.
One would always be tempted to ask what took you so long to come back to your own country?
Anant: Once you graduate from a school in the US you want to really take that further and get some professional work experience abroad. If we had moved back right after our graduation to India I would have never been exposed to this new field of quantitative investing which offers a different approach and thinking towards investments.
The experience that you get while working for firms like AQR and Goldman adds tremendous value to your understanding of the markets and it would not have made sense coming back to India immediately after graduation.
Radhika: And I don't think we could have done what we are doing in India today without the years of experience we had at our respective workplaces.
But why choose India for your entrepreneurial journey? Why not right there in the US or the UK or some other country?
Anant: All three of us were born and brought up in India so all of us wanted to come back to India in the long term. We thought why not explore an entrepreneurial opportunity in one's own homeland.
There are already many companies doing this kind of investing in the US -- for example the huge firms we were working at were doing it already. So for us to differentiate there would have been on the harder side.
But in India the market opportunity was tremendous as there was nobody doing quantitative investing in India. So we thought coming back to India would help us explore an opportunity and offer a differentiated product to Indian investors.
Click NEXT to read all about quant investing and career opportunities for people with this skill set.
Image: From left: Anant Jatia and Nalin Moniz
'Running start-ups is a roller-coaster ride'
Tell our young readers something about quantitative investing. It sounds so exotic. What qualifications do one need to become a quantitative investing expert? What are the career opportunities for people with this skill set?
Radhika: Quantitative investing is way of applying mathematics to the markets, quite simply. It relies on data about the fundamentals of companies and markets to make investment decisions, rather than instinct. It is a way to eliminate biases and bring discipline into the investment process.
Quantitative investing represents an investing technique typically employed by the most sophisticated, technically advanced hedge funds. These quant shops employ fast computers to find predictable patterns within financial data.
Quantitative investing has been done globally for more than 15 years at firms like Goldman Sachs, Renaissance Technologies, D E Shaw, AQR Capital, GMO, Blackrock and others.
Anant: Quantitative investing requires a background in both economics/finance (to understand the markets and what drives markets) and computer science/engineering (to build the economic models in code).
Career opportunities include: Roles at hedge funds/mutual funds, quantitative asset management/investment firms, roles as research analysts at brokerages/sell-side firms, roles as quantitative traders, or in academia.
It is a very flexible skill set that can be used in a number of different ways.
Typically, people who have spent time in the physics, math, computer science, or statistics disciplines implement quant investing. The process consists of thorough examination of vast databases searching for repeating patterns -- typically positive or negative correlations among liquid assets or price-movement patterns.
What kind of response did you get from your investors when you set up your quant shop in India?
Radhika: The response has been very positive. Our investors were very encouraging and they trusted our academics and experience to help them invest better and get good returns. As far as our clients are concerned there reaction was more positive towards quant investing than we had expected.
I think Indian investors have matured today and are constantly looking at new investment ideas to put their money in. Our investors love the transparency in our business.
When you thought of Forefront in early 2009 the stock markets were nose-diving. Many investors were biding their time, looking out for some sort of stability in the global markets before they could commit their money. In such a situation what were the challenges that you faced while attracting business?
Anant: We always knew that it was going to take us few months to get our operations running in early 2009. But then the general elections happened in May 2009 and the markets rebounded 17 per cent and overnight there was a switch in sentiment.
From our perspective we had to be there when the markets were rebounding and investors were slowly returning to equities. It was our chance to tell investors that they had had a bad time in the market but we were bringing something new, a tried-and-tested methodology, a new way of doing investing so when you are coming back to the markets why don't you try new opportunities.
What were the challenges that you faced as a start-up company? How did you attract employees, garner business?
Radhika: I will answer the second part first.
The firms that we worked with while in the US gave us tremendous network in the market. Whether it was the Wharton network or McKinsey network or the Goldman network. That itself gives you a good start and a good set of people to meet. For us that were the first test: to get this network working.
Anant: The challenge was on the client side from where we would get initial investors who were willing to back our idea. The other challenge was getting used to the Indian style of working. We found that things in India worked a bit on the slower side, follow up with people to get your work done.
Speeding things up was a bigger challenge especially when we had come from a background where you always thought of how to do move things quickly and efficiently. But India works at her own pace.
What kind of difference did you find in the work ethic the way people do business in the US and in India?
Anant: We found that Indian people had their own pace of working. Things move a lot slower out here. A scheduled meeting probably gets rescheduled three times before it actually takes place.
On the positive side India was more about building relationship rather than a transactional approach. In the US relationships are based on transaction. Once the transaction is done both sides go their own way.
In India it's all about building that relationship for the long-term so that initial work required is a lot more to get started but then it's more long lasting.
What's your business model like? Not many people understand how portfolio management system businesses make money?
Radhika: Many of your readers will be familiar with mutual funds. In India investment management services are provided by mutual funds as well as portfolio management services. PMS managers manage and operate a portfolio of stocks for a client/clients to deliver them better returns. In turn, we charge them a fixed fee.
Anant: Our primary source of earnings is fee-based income we charge our clients. We have other revenue streams in wealth management where we, instead of directly investing clients' money, advise them on how to allocate their capital across different asset classes outside of Forefront products and we get paid for that advice.
How does PMS work? Do you collect money from your clients and invest on their behalf? What kind of returns do you offer to your investors?
Anant: The way it works is our clients open a bank account and a demat account in their name. Forefront has a power of attorney over that demat account based on which we buy and sell shares for our clients. Though we don't really comment on returns we earn for our clients our returns broadly outperform the market returns. And keep on outperforming different benchmarks consistently.
Most PMS invest their money in small-cap and mid-cap equity shares of listed companies. Forefront however, focuses more on large-cap shares. So our benchmarks are the Nifty 50 and the BSE 200.
What kind of money did you invest to start Forefront? What kind of revenue did you report in the first year of operation and what are your projections?
Radhika: The firm is fully funded by the three of us. The market regulator (Securities and Exchange Board of India) mandates capital requirement of at least Rs 2 crore to start a PMS company. Even in the strategies that we devise for our clients our own money is invested. We have already turned in a profit in the first year of our operation.
Forefront's success mantras...
Anant: One is our unique and differentiated product that comes with expertise and specialisation. The other is a very transparent and open approach where we disclose all information to our investors about our fees, charges and strategies, and the portfolio we hold for them.
The most important thing behind our success is our passion. The three of us love what we are doing every single day so we can work 12 to 13 hours, six days a week and still go home and feel happy about what we have achieved.
Radhika: The fourth is that we are a team of people who have known each other for many, many years. This has helped understand each other's strengths and weaknesses. Also, in a start-up it is easier to grow as a team than as an individual. Running start-ups is a roller-coaster ride. There are great up days and there are great down days. And if you have a committed team they all support each other through such days.
How big is the team at Forefront?
Radhika: We don't want to comment on the exact number of employees. The three of us make the main investment team and we have staff to handle our back office operations.
We are not going to be a 100-person team. We are a lean team. Most of our investment office is computer-driven so we manage to automate the interactions, transactions between the back office and front office to the extent that we can make our computers do a lot of things. That's our approach and that in a way has helped us keep our costs low and make a profit.
Lessons learnt during your entrepreneurial stint in India...
Radhika: You have to have tremendous patience. Keep going at it; keep working with people, talking to people. That eventually helps a lot. For me that is the single biggest lesson. You need to have strong business ethics and you need to have commitment of what is right and wrong and I am going to do what I think is right.
Anant: I learnt that one need to have focus on what you are doing. As you move along you come across multiple-level options to completely overhaul your business model, sell stakes to other people and exit your business. But you need strong belief in yourself to stick to your original plan and think more long term.
Your dos and don'ts for young entrepreneurs...
Radhika: Do a business that you are good at and love. If you are good at cooking run a restaurant. If you are into a business for glamour and money you will find it hard to sustain it.
Anant: On the don't side don't add huge costs -- variable or fixed -- to your business with the hope that you will be able to recover them in the future. A lean cost structure, especially in the early days, will help you sustain your business. Don't have a high cash burn rate when you start.
Image: Anant Jatia