Description

Edelweiss Financial Services Ltd.  – EDEL IN         Asset Management, Asset Reconstruction, Insurance                                                                                                                                                                                                                      09/2024

Market Cap:  $1.2bln USD.  Volume:  $14mm USD/Day    Valuation:  11.8x F12e Earnings                                                                      ROE:  16.8% F12e

Executive Summary:  Investment Thesis and Catalysts.

Edelweiss is a diverse financial services firm that contains the largest private credit and private real assets fund manager in India (‘Edelweiss Alts’).  Edelweiss’ management recently publicly discussed their plan to sell a strategic minority stake in the Edelweiss Alts business unit as well as to IPO the Alts unit to div-en-specie the shares directly to Edelweiss shareholders.  The last time Edelweiss div-en-specied a business, handing out shares in Nuvama – their wealth management unit – the Indian market did not adjust properly for the div-en-specie (it being maybe the second div-en-specie in the history of the Indian market), and investors in Edelweiss were handed a one-day gain of ~+80% in the form of Nuvama shares (and Edelweiss shares went up that day).  Now, they are publicly broadcasting that they will do this again, with potentially a much more valuable business – the largest pure-play Alts manager in India.[i] 

In the August 2024 earnings call, Edelweiss’ CEO, Rashesh Shah discussed the high demand for the Edelweiss Alts IPO, to occur sooner than later.  He stated that Edelweiss will provide a detailed, comprehensive value-unlock plan for the holdco, including potential plans to IPO Edelweiss Alts, in the Q3 quarterly results (to be announced in November).  Even after the share price rally this month, the midpoint of Alts firm valuation data in emerging Asia (a valuation ratio of 30% of AUM) would value Edelweiss Alts alone at ~173% of Edelweiss’ market cap.[ii]  This assigns no ‘India premium’ to the regional peer median.  Edelweiss Alts’ growth potential we believe far exceeds the peer group median.  We believe that the group is so greatly undervalued in part because the Indian market misunderstands how to value alternative asset manager GP stakes (see below Appendix).  When combined with our sum-of-the-parts of their other businesses, Edelweiss shares are worth over >4.3x the current market cap at the midpoint of our valuation assumptions.  While there are many undervalued holding companies in emerging markets, the upside here has become immediately relevant as Edelweiss unveils highly unique plans to directly unlock value for the benefit of all shareholders, in the near term.

Company Description: 

Edelweiss Financial Services Ltd. (“Edelweiss”) is a diverse financial services firm in India, which has evolved from investment banking origins to focus on asset management, asset/debt reconstruction, and insurance.  Within asset management, Edelweiss Alts is focused on yield-generative private market fund management, particularly private credit and private real assets.  With an estimated >$7bln in AUM, Edelweiss Alts is not only the largest private credit and the largest private real assets manager, but also more generally the largest private market fund manager in India.  Edelweiss also manages mutual funds and has >$16bln in mutual fund AUM.  Within Asset Reconstruction, their unit EARC is the largest debt collection/reconstruction provider in India.  They purchase portfolios of non-performing loans from banks and non-bank lenders and work out repayment.  Through other units, Edelweiss provides wholesale credit and housing finance.  In insurance, Edelweiss has Edelweiss Life Insurance Co., and Zuno General Insurance, a fast-growing, digital native insurance provider.   Edelweiss previously built Nuvama Wealth, their wealth management unit, which they spun-out to shareholders in a dividend-en-specie in 2023. 

Edelweiss’ shares currently present a special situation, in our view, because they are a holding company of 7 independent businesses, and they have recently begun a program to unbundle and unlock value directly for the benefit of shareholders.  The promoters, Rashesh Shah and Venkat Ramaswamy, have explained their value unlock strategy in detail over the last two years, but they provided further emphasis on the near term value unlock strategy in the most recent quarterly earnings call (August 2024).  As CEO Rashesh Shah stated in the Q1 2025 (June) quarterly call, “… we don’t want to remain a Holdco, which has all the assets underneath that.  We want to unlock the value and share that value with all the shareholders along the way.”  It is extremely rare in emerging markets, and especially in India, to find a promoter led conglomerate that is pursuing a strategy focused on efficiently unlocking value from the structure for the benefit of all shareholders.  This value unlock program, particularly of Edelweiss Alts, appears completely misunderstood and underappreciated by the local Indian market, which in our view, provides a host of near-term catalysts to directly rerate the stock.  The Nuvama div-en-specie last year provided a wild example of the Indian market failing to recognize the value of an active value unlock program, as it failed to price-in the div-en-specie in advance, causing a huge one-day gain.[iii]

Within the holding company, the largest business by our estimation of fair value is the most underappreciated by the Indian market, which is also the business that management is most imminently planning to unlock for shareholders – Edelweiss Alts – the largest private market asset manager in India.  We focus this report on Edelweiss Alts as well as Edelweiss’ shareholder value unlock strategy.  These factors provide the greatest drivers of our investment thesis.  As described in the Appendix to this report, listed Alts and GP stakes are also the industry within Edelweiss in which we have the most experience analyzing and investing globally.  In our view, Edelweiss Alts alone is worth a multiple of the market cap of Edelweiss, and may soon be independently listed and directly in the hands of current Edelweiss shareholders.

Edelweiss Alts – the Largest Private Asset Fund Manager in India

Edelweiss founders’ Rashesh Shah and Venkat Ramaswamy have their backgrounds in investment banking.  With a view to develop businesses with recurring value-add to customers and recurring income profiles, they formed both the asset reconstruction/debt restructuring unit, EARC, as well as their first private credit fund of third-party AUM within Edelweiss Alts in 2010.  Alternative investment allocations in India are in a very early stage of their development today, and institutional private credit funds in a GP/LP structure essentially did not exist in India in 2010.  Edelweiss, the pioneer in the space in India, received an anchor investment for their first private credit fund from a Swedish pension fund, which they augmented with internal capital, GP commitment.  Their focus since day one has been on generating reasonable, attractive yields to investors, while focusing on the highest governance standards, and not losing money.  In this emphasis on the downside and ‘not losing money’ we see parallels to the professed philosophy of Stephen Schwarzman of Blackstone.[iv] 

In this year, 2010, the total Indian alternatives investment space comprised $23bln in AUM, and Edelweiss’ was the first Indian private credit fund.[v]  Their focus was performing credit, achieving net investor returns in the high teens to low 20s percent range, and surpassing achievable private credit returns in the US by several hundred basis points.  Their success in their first performing credit fund, as well as building upon their European institutional client relationships, enabled Edelweiss to launch their second credit fund by 2016, with capital primarily from very large and well-known pension funds in Canada, the US, Scandinavia and Germany.  Their private credit client base today remains majority comprised of yield-seeking pension and insurance companies, including many of the world’s largest and most sophisticated alternatives investment allocators (2/3 outside of India).  We believe that their very large and sophisticated international client base is an invaluable asset in continuing to grow their platform to offer other Indian investment products to these international investors, but also to win over the nascent Indian institutional allocations in private credit and private real assets which we see newly forming.  What better way to convince Indian institutional allocators to invest in a new asset class than to point to a track record investing for Ontario Teachers, US state employee pension plans, and others of the best known and respected institutional allocators in private assets from North America and Europe.

Yield focused private credit and private real assets fund managers generally target providing attractive rates of return relative to risks for pension and insurance companies with long duration capital, and differs from the high return, high individual investment risk profiles of venture capital and traditional private equity or buyouts funds.  Peers with a strong presence in private credit and real assets include Blackstone, Brookfield, Ares, Oaktree, Cerberus, and Macquarie.  We believe it is notable that consistency-focused private credit and real assets strategies have helped to form some of the world’s largest private market investment firms and may be better suited to enterprise building than the high-risk, high-return world of VC and PE.  As we write about in our below Appendix, and in our industry piece on Listed Alts in Emerging Markets, there are numerous ways in which private market investment fund managers (GPs) create platform economics as they scale – industry relationships, deal sourcing, talent recruitment, operational expert networks, reputational investment halo effect, diversification of LPs, investment strategies, and teams, all can be somewhat self-reinforcing as firms scale.  There is well-researched and published performance persistence among top-performing private market fund managers.  These industry dynamics give successful private market fund managers strong customer pull and pricing power.  Globally, private credit and real assets have risen in prominence from 8% and 16% of global Alts AUM in 2005, respectively, to 12% and 22% respectively in 2023 – their global growth has outstripped that of better-known VC and PE categories.[vi]  While VCs and PE firms may as of yet be better known and perhaps perceived as “hotter” in India, we believe that to build a firm with enterprise value, yield generative strategies in private credit and real assets may be better starting points. 

Today, Edelweiss has 4 distinct investment strategies, ranging in vintages from fund II-III, including performing credit, special situations credit, real estate credit, and real estate yielding infrastructure.  Two thirds of their capital today is from offshore institutional investors, especially large pension funds and insurance providers.  All the lead PMs of Edelweiss’ Alts funds have been with the team for 14-16 years, being among the most experienced in the space in India given Edelweiss’ pioneer status in private credit and private real assets.  Edelweiss’ size may allow it to establish relationships which provide relatively proprietary deal flow, and this flywheel effect may benefit from increased scale.  Edelweiss’ competitors in India include Kotak Mahindra, other smaller units within banks and brokerages, as well as global majors themselves such as Blackstone, Blackrock, and Ares.  Edelweiss has been very successful at raising assets, under the leadership of Venkat Ramaswamy, with surprisingly minimal marketing team build-out.  Edelweiss has a two-person business development team in New York City, one business development employee in Chicago, and support from the team in India.  We believe that there is significant further buildout that can leverage their tier-1 client relationships and track records.  A larger strategic partnership in Alts could be helpful to tap into dedicated distribution channels which are rising in importance in Alts in North America.  As they scale and diversify, Alts firms can become asset-raising juggernauts, with large IR professional teams and entrenched distribution relationships.  Edelweiss currently has a significant amount of dry powder. 

The Alts AUM / GDP ratio has reached 25% in North America.  Many institutional allocators with longer duration capital have increased their Alts allocations from near-0 thirty years ago to 40% portfolio allocations and higher.  In India, total Alts AUM is still only 3% of GDP, and is growing much faster than North America.  Indian alternative asset allocations have risen in size 4x from 2010-2023.  Within Alts, private credit and real assets allocations in India have grown 14x from 2010 to 2023, to reach $28bln in allocations in these two asset classes.  Edelweiss has grown Alts AUM by 3x in the last 5 years.  This figure provides a market share for Edelweiss within private credit and private real assets funds managed of >22%, a relatively dominant position vs. top-tier managers in other markets.  Edelweiss has far greater market share in these categories in India than Blackstone or Brookfield have in North America.  Edelweiss estimates that Indian allocations to private credit and private real assets can grow to $225bln by 2035.  Even if Edelweiss were to lose significant industry share, as can be expected as the industry develops and new managers launch, there is room for Edelweiss to diversify its product offering, launch larger funds, and scale to several times its current AUM in the next ten years.  Real assets, in our view, is the category with greater scalability in India and has been a bedrock of enterprise development at the world’s largest Alts investor, Blackstone.  In India, Edelweiss has a growth profile that frankly does not exist, in our view, in more developed markets.  We believe Edelweiss’ strong positioning and growth potential justifies premium enterprise valuations vs. global peers.  Being the largest manager in such a unique growth environment makes Edelweiss a highly sought-after strategic acquisition partner for the large global Alts managers, GP stake acquirers, and LPs, in our view.[vii]

Unlike private equity, private credit funds generally only charge management fees on deployed capital, and this explains the current large non-fee paying AUM base of Edelweiss, and also provides the potential for high-visibility earnings growth in Edelweiss Alt in the next 1-2 years, as simply deploying the capital already committed will enable them to grow fee-paying AUM and therefore management fee revenue significantly, providing high operating leverage going forward.  We believe that the Alts unit will continue to rise to be a large share of Edelweiss’ group earnings, and it already provides the largest share of Edelweiss’ group shareholder value, due to the higher comparable and deserved valuations of Alts GP firms.  Edelweiss size within private credit and private real assets may help provide the foundation to expand into private equity / buyouts, and other private market categories.  As Stephen Schwarzman has said, paraphrasing, ‘we started as a PE firm and now we do 60 different things.’

Edelweiss strong growth in mutual funds is also worth noting, though we spend less time on it here, as we believe it’s value is better understood in the Indian financial community.  Edelweiss mutual funds have grown AUM by 6.7x in the last four years.  While private market fund managers are much more valuable per Dollar of AUM due to the longer duration of capital and other factors discussed in our Appendix, this is nonetheless a highly valuable business unit for Edelweiss.[viii]

Holding Structure:

The value-unlock approach that Edelweiss took with Nuvama Wealth Management, executed last year, provides a useful case study for the future unlocking of Edelweiss’ other business units.  Edelweiss took the approach of selling a minority stake to PAG – a large pan-Asian private equity firm – to help put a valuation mark on the business and to bring in a strategic partner.  They then listed Nuvama and passed through the majority of their shareholding directly to shareholders (a dividend-en-specie).  In an efficient market, the share price of the holding company (EDEL IN) should advance upon announcement of the planned dividend, and should fall upon the ex-date of the dividend en-specie by the market value of the dividended-shares (just like it should with cash dividends).  However, this was possibly the second dividend-en-specie in the history of the Indian market, and local market participants seemed not to understand this value-unlocking approach.  The result is that investors in EDEL were handed shares of Nuvama worth ~80% of the market value of their EDEL shares, and the EDEL share price went up that day.  In other words, the last time Edelweiss management followed an unlocking strategy to dividend-en-specie a business unit, they handed shareholders a one-day 80% market return, and they are now clearly communicating that they will do the same with Edelweiss Alts, a potentially even larger business relative to the market cap of Edelweiss.  Since its stand-alone listing and div-en-specie, Nuvama shares have continued to appreciate.  While Edelweiss shares have risen substantially since the value unlock announcement, they have still not come close to reflecting the fair value of just this one soon-to-be unlocked business, in our view. 

More generally, in investor decks and earnings calls in the last two years, Edelweiss’ management has described how the highly successful Nuvama value-unlock approach provides a potential blue-print for unlocking value in the current 7 businesses of Edelweiss, to give to shareholders.  We think this is a great approach, to first sell a minority stake to an anchor, strategic investor, to help put a mark on the business, to then list and dividend-en-specie to pass through the remaining value directly to shareholders.  In Edelweiss Alts, management announced in the June 2024 quarterly call that they may actually skip the first step and proceed to IPO Edelweiss Alts in the near term, due to the high investor demand for what would be the first pure play listed private fund manager in India.

We are extremely impressed by Edelweiss’ founders, Rashesh Shah and Venkat Ramaswamy.  In a conversation, Rashesh described how he has read The Outsiders by William Thorndike Jr. several times – a beloved read for capital allocation focused value investors (an “outstanding book about CEOs who excelled at capital allocation” according to Warren Buffett).[ix]  In our view, Rashesh and Venkat are unique not only in India but across the global emerging markets, for caring about shareholders, for assessing shareholder value unbiasedly, and for focusing on the optimal way to deliver value for shareholders.  Most promoters want to empire-build, regardless of whether or not that is actually good for shareholders.  Rashesh and Venkat are openly pursuing a strategy of unlocking value and distributing it to shareholders because they believe that will provide the optimal long-term value for shareholders, which includes themselves.  Rashesh and Venkat and other family entities own about 30% of Edelweiss, and including other management and employees, insiders own over 40% of the shares.  To find such a clear shareholder-oriented, ongoing, value-unlocking program in a fast growing, high-quality business in India, in our opinion, is singularly unique.  If readers of this report are aware of another listed company in India with a high-quality, fast-growing platform business that is actively unlocking value for the benefit of shareholders through massive special dividends that the market is not yet pricing in, please let us know about it!

We further appreciate, as actively engaged investors, that Edelweiss’ founders, Rashesh and Venkat are very open to discuss topics of shareholder value creation with shareholders directly, as expressed in their earnings conference calls, which we also think is highly, positively unique among promoters not just in India but around the global emerging markets. 

Balance Sheet:

Edelweiss continues to hold ~14% of Nuvama Wealth Management following its dividend-en-specie last year.  Nuvama shares have continued to appreciate as a standalone listing.  This has brought Edelweiss’ remaining stake in Nuvama shares to a market value of $382mm, or 31.1% of the market cap of Edelweiss.  Edelweiss has a roughly estimated $250 million in investment in its own private credit and real asset funds (GP commit).  They have successfully brought down the GP commit as a percentage of their funds over time.  In total, this means that Edelweiss has more than half of its market cap (even after the August rally) in non-core listed stocks and fund investments.  These investments can be harvested in the future to either pay down debt or (our preference) to buy back their undervalued stock. 

Edelweiss past mistakes (according to management’s own interpretation) in the proprietary credit book dominate market perception, in our experience, and continue to represent a material part of the balance sheet.  Edelweiss management has clearly communicated the strategy of continuing to reduce the prop credit book (the NBFC business in the investor deck), with targets to bring this exposure to an immaterial level within the next two years.

Edelweiss’ overall net debt position is a bit philosophical to analyze, given that some of their businesses effectively borrow-to-lend (like a bank).  They disclose net debt positions at the individual operating company level, and they also have corporate level net debt of ~$1.2bln (net of non-core investments).  All of the business units are highly capitalized, but they can receive better terms and more flexibility by borrowing to an extent at the Holdco level.  This raises the philosophical valuation question in our view, because if housed within the underlying operating companies, which are financing businesses, their net debt may be valued differently (or not at all) within a sum-of-the parts valuation – markets often look at earnings multiples of financing businesses without factoring in debt so long as the financing metrics are reasonably strong.  In our valuation assessment (below), we do factor in Edelweiss’ corporate level net debt, but utilizing the estimated balance for T+3 years, as they are rapidly paying down net debt, and this timeline aligns with our typical investment holding period.  This results in a net debt position of $688mm, but their Nuvama stock and own-fund investments balance is currently $632mm.[x] 

Edelweiss’ book value of shareholder equity is another way of assessing the balance sheet for valuation purposes and stands at $723mm.[xi]  While book value can be a meaningful measure of valuation for several of Edelweiss’ business units, such as prop credit, asset reconstruction, and somewhat for insurance, on the contrary, asset management is a business type that can be highly profitable with zero book value, i.e. book value is not a meaningful measure of shareholder value.

Key Risks: 

As with all investment management firms, there is the hypothetical risk of prolonged underperformance of the firm’s investment strategies.  We believe that the firm’s experienced investment teams, deal sourcing networks, portfolio diversification, and the rising prevalence of scalable investment opportunities may help Edelweiss to continue to deliver strong performance.  Diversification, both within their portfolios, and critically beyond, to include more investment funds is the ultimate mitigant of underperformance risk to the firm’s enterprise value, in our view.  Diversification of fund vintages and multiple investment funds also helps to mitigate vintage risk.  There is the risk of turnover of investment professionals, including key fund managers.  This risk can be mitigated by fostering multiple key investment professionals on each strategy, and seeking to mitigate a ‘rock star’ fund manager culture.  Incentive compensation is designed to reward performance and align interests with fund investors.  Edelweiss management prides itself on a culture of hiring and promoting based on merit.  In our view, diversification of investment strategies, investment teams, and investors, are the ultimate drivers of enterprise value of alternatives investment firms – making them a platform business as they scale.

Edelweiss’ asset reconstruction business unit and prop credit investing unit, ECL Finance were recently hit with a fine and a mandated stoppage of acquiring additional NPL assets by the RBI, a key Indian financial market regulator.  The regulator claimed that certain of Edelweiss ARC’s policies amounted to negative greenwashing.  While Edelweiss refuted this claim, it has paid a very small (immaterial) fine and has agreed to continue to refine its reporting and governance policies.  Importantly, the regulatory crackdown did not involve Edelweiss Alts or Edelweiss mutual funds.  In the period since the RBI announcement in the early spring, Edelweiss has had more than a full quarter of operations, and they successfully grew assets under management in alternatives’ funds in this period.  Edelweiss Alts AUM grew +17% yoy in Q1 2025 (ending June 2024) and grew fee-paying AUM by +32% yoy in this period.  Edelweiss mutual funds business unit grew AUM by +24% yoy in Q2 2024 and grew equity mutual fund AUM by +71% yoy in this period.[xii]  We believe the very small size of the fine, the lack of connection to Edelweiss’ managed funds, Edelweiss Alts’ strong governance track record, and the LP support expressed in successful asset raising since the announcement, all bode well in terms of this potential risk. 

Edelweiss insurance businesses remain subscale and loss making.  Management has disclosed plans to reach breakeven in the insurance businesses by 2026 or 2027, and losses have generally reduced over recent years.  Both units are generating losses due to customer acquisition costs to achieve scale sufficient for profitability.  We believe that their digital, general insurance unit, Zuno (ZGIL), in particular, could be interesting for fintech strategic partners, which could also help to put a valuation mark on the business (similar to the approach with Nuvama).  We believe that the Indian market is currently implying a negative valuation of Edelweiss’ insurance businesses, due to the income statement losses, though we believe these businesses will show to have positive shareholder value over time.  Even if these units due not come to form material value to Edelweiss shareholders, simply a reduction in losses of this unit would help to improve Edelweiss’ share price, in our view. 

Edelweiss’ proprietary wholesale credit investment portfolio has been a loss generative area in past years, in particular during the Covid period.  Management has guided a continued reduction in the prop credit book, NBFC, and the portfolio is anticipated to be immaterial to Edelweiss’ intrinsic shareholder value within the next 12-18 months, in our estimation.  We believe this could be a key driver of market recognition of value for Edelweiss given the negative market perception that the NBFC unit created in the past, which we believe still unjustifiably drive the group’s overall market perception.

Valuation:

We believe that Edelweiss is dramatically undervalued in the Indian retail trader-dominated stock market because the high quality of Edelweiss’ larger business (units by shareholder value) are little known and misunderstood.  What Edelweiss is known for, in our view, is being a complex holding company dominated by its past challenges with its prop credit portfolio.  Edelweiss is perceived by Indian retail traders as being a weird, complex holding company that makes bad loans, while in reality Edelweiss has evolved to become the largest private credit and real assets fund manager in India – a collection of businesses which generally command high comparable fair value.  Edelweiss’ Alts large international fund investors know firsthand the value of GP stakes, and Edelweiss’ franchise, but these large American pension funds and insurance companies do not invest in single Indian stocks.  By contrast, we doubt that most Indian retail traders really know what private credit is, let alone how these businesses tend to be valued globally.  The lack of a pure-play or standalone domestic “comp” alternatives asset manager in India has prevented Indian market participants from recognizing the high valuation typically assigned to alternative investment fund managers.

We value Edelweiss’ business units using a sum-of-the-parts analysis, but arguably, the overall consolidated P/E ratio of Edelweiss, of 11.8x F12 using our estimates, is very cheap, both for asset management companies globally and especially cheap relative to India’s high market valuations – due to India’s large local investor base and high structural growth – ie the ‘India premium’.  Indian investment management companies, which are generally mutual fund managers with lower quality business dynamics and lower growth potential than Edelweiss Alts, nonetheless tend to trade north of 25x P/E.[xiii] 

Edelweiss Alts is currently Edelweiss’ most valuable business unit, in our view.  We value Edelweiss Alts using the mid-point of our private equity and private credit fund manager strategic acquisition valuation data in emerging Asia, which is at a valuation metric of 30% of AUM.  This is a high valuation by developed markets GP interest’ standards, but Asian private market fund manager valuations are so high because Asia is broadly viewed by both public markets and strategic peer acquirers as providing the largest share of global growth in private market investing.  We think this is more true of India than arguably any other place in the world.  At 30% of our estimate for Q4 2024 AUM ($7.4 bln AUM), Edelweiss Alts unit is worth >$2.2bln USD.  By comparison, Edelweiss entire current market cap is $1.2bln USD.[xiv] 

We believe even this valuation fails to reflect the high growth potential of Edelweiss Alts.  At the estimated 2035 AUM of private credit and real asset funds, as alternatives allocations develop in India, and using a modest reduction to Edelweiss’ current market share in these fund categories (to 20% ms), this would provide Edelweiss with $45 billion in AUM by 2035.  A 30% valuation multiple of this projected AUM would value just Edelweiss Alts business unit at $13.5 billion, or roughly 10x the current market cap of Edelweiss Alts, providing no value to their other six business units.  While this should certainly be viewed as a bull case, in our view, it reflects the high potential shareholder value of future industry growth, of which we have strong conviction in India.  Even if we assume that private credit and real assets funds’ in India achieve only half of this projected growth, and if we assume a major reduction in Edelweiss Alts fund management market share to 15%, and if we use a lower industry valuation percentage of AUM, we arrive at a forward valuation of Edelweiss Alts business unit of roughly $6bln, or ~5x the current market cap of all of Edelweiss, still providing no value for all their other six business units, under this we think conservative set of assumptions.  This math highlights the degree of misunderstanding and undervaluation of Edelweiss Alts and thereby the Edelweiss group, in our view.

We value Edelweiss mutual fund business, EAML, using the current Indian forward twelve month estimated P/E of the asset management sub-industry, which is 25x P/E, and applying it to our F12 earnings estimate for EAML, arriving at shareholder value of EAML of $389 million.[xv]  We feel that this is conservative, and may significantly undervalue this business unit, due to its large and fast-growing AUM base.  Our goal though is to be conservative in our valuation approach.

For the asset reconstruction unit, EARC, we reflect the current regulatory risk by valuing it at a 25% discount to the global emerging market median P/E ratio, which results in a P/E of ~10x.  This ignores the very high current ‘India premium’, but nonetheless results in a fair valuation assumption for EARC, the largest debt restructuring business in India, of $407mm.[xvi]

We value Edelweiss’ prop credit book NBFC (in its wind down) at 0.5x book value, to be overly conservative, and we value their small Housing Finance unit at 1x book value, resulting in assumed fair value of these businesses of ~$300mm.[xvii] 

We value Edelweiss’ two insurance businesses at a 25% discount to the Indian median P/B ratio of insurance companies, resulting in assumed fair market value of ~$600mm.[xviii]  We believe this could particularly undervalue their fast-growing, digital native insurer, Zuno, but again our aim is to be conservative. 

Then Edelweiss’ corporate level net debt is currently $1.8bln USD.  Edelweiss additionally has an estimated $250mm in own Alts fund investments, or GP commit, which can be reduced as a percentage of AUM over time, in our view, and will continue to generate gross returns within their funds.  Edelweiss retains ~14% of Nuvama Wealth Management, whose stock has continued to perform extremely well post-IPO, and now has market value of $382mm.[xix]  Imputing the effect on enterprise value of Edelweiss’ consolidated net debt is a bit of a philosophical exercise, in our view, because several of their financial services businesses fundamentally borrow-to-lend as part of their business.  As such, we do not think that applying the entire net corporate debt in valuing Edelweiss’ enterprises makes sense – another way of looking at this is how the market values these businesses generally on a P/E basis (not adjusting for net debt, within reasonable limits).  Nonetheless, in our valuation, we take the T+3 estimated value of their corporate level net debt of $688mm USD, which is a time period that aligns with the typical investment time horizon of our fund. 

In sum, we see the fair value of Edelweiss, based on this range of assumptions within our holding period as:

Edelweiss Alts:  $2.2 - $5bln USD

Edelweiss Mutual Funds (EAML):  $389mm

Edelweiss Asset Reconstruction (EARC):  $407mm

Edelweiss two Insurance Cos:  $645mm

Edelweiss NBFC and Housing Finance:  $301mm

Edelweiss Net Corporate-Level Debt, T+3e (liability):  $688mm

Edelweiss Own Fund Investments and Nuvama Stake:  $632mm

Edelweiss Fair Market Value:  $3.9bln - $6.7bln;  Current Edelweiss (EDEL) Market Cap:  $1.2bln. 

I.e. Fair value upside of 3.1x – 5.6x vs. the current stock price; target fair share price for EDEL of 350 – 633 INR per share.

Appendix:  Miri Capital Thoughts About Listed Alts – Private Market Asset Managers in the Emerging Markets

    In recent years, listed private equity and private credit (and generally private market asset) investment firms in the Western developed markets have come to be understood as high quality platform businesses.  That was not always the case.  We think the rerating achieved in the years post-listing, of the Western majors including Blackstone, KKR, Apollo, Ares, Brookfield, EQT, Partners Group, and others, was a function both of, 1) changes made by these firms in order to work better as public listings, but also, 2) the market’s recognition of PE firms’ compelling business characteristics.  In the former point, 1) firms opted to minimize shareholder dilution, but to give the team a larger share of the performance fee earnings (PRE – which markets have a hard time valuing) and to pass through to shareholders substantially all of the management fee related earnings (FRE).  In the latter point, 2) these positive characteristics, which make PE fund managers substantially more valuable enterprises than mutual fund managers, in our view, include: long duration capital (probably the most important attribute), documented outperformance persistence, the ability to diversify across not just funds but uncorrelated sub-asset class categories, and to diversify partners/team and the LP base over time.  As private market investment firms grow, they evolve from single-fund, single manager-driven ‘garage bands,’ into branded and channel-entrenched platforms with diverse teams who raise sticky and sophisticated capital and source lucrative deals.  We like the Stephen Schwarzman quote of, paraphrasing, ‘we started as a private equity fund, and today we do 60 different things.’  This process allows PE firms to become platform businesses as they scale. 

    While we can look back at the ‘privateequitization of everything’ in the US, we believe that we are in the early innings of this process in Asia and most emerging markets.  This maturation of private market investment, and the corresponding recognition of the potential enterprise value of scaled private market investment firms, largely has yet to occur.  Asia’s private equity AUM to GDP ratio is today roughly ¼ of that of the US, and is growing substantially faster than the US.  Legal frameworks, institutional investor allocations, and perhaps cultural norms are evolving to facilitate a similar rise of PE in some of our markets.  The environment for deals in some Asian countries, notably in Japan and Korea, strikes us as similar to the US in the 1970’s or ‘80’s (paired with lower interest rates).  Other markets, like South East Asia and India, have significant growth potential in terms of the drivers of both savings in alternative investment strategies and the kinds of larger companies for whom private market capital can be more suitably deployed by private fund managers.  This makes sense in terms of the timing of economic development in these countries.  Japan in particular is seeing a succession crisis among family-owned firms, and Korea is not far behind.  Real estate ownership by listed opcos is pervasive in Asia, and sale-leasebacks are in their infancy.  “Private equity incentives” (as they call it, though there should be no unique claim here on equity performance incentives to align interests) have been ramped by US private and public companies alike, but tend to range from absent to immaterial among companies in much of Asia.  Many listed companies have 50% or more of their market cap in net cash.  We see private deals and public company acquisitions happening at valuations below the value of their real estate.  Price levers, even among businesses with extreme pricing power, have yet to be taken, and cost offshoring tends to be minimal.

    By contrast, many US firms, both public and private, have already been owned by 3-5 private equity firms, each with their own overlapping operational playbook.  In our view, the pervasive private equity model, and the intense shareholder focus of the public market in the US, has led to the optimization of shareholder value in most large US companies:  maxxed out pricing strategies, minimized costs structures and working capital, just-in-time capacity, management incentives, optimized capital allocation and especially employment of leverage.  These were shareholder value improvements in the US that started perhaps from the 1980’s, which interestingly, are levers that generally cannot be pulled twice in terms of their effect on valuation.  By contrast, in much of Asia, firms we look at have usually had 0 private equity owners.  Our average portfolio company not only has no net debt, but has nearly half of their market cap in net cash and investments.[xx] 

    This landscape awash with attractive targets makes us not just excited about our approach in general, but it also highlights the potential for private equity operators in Asia.  The inefficiency of the public equity markets in Northeast Asia – arguably to the extent of being fundamentally broken – is another opportunity for PE – take-privates and especially MBOs are going exponential in Japan currently, and we think Korea is next.[xxi] 

    Private equity firms and GP stake acquirers in the West also appear to recognize the nascent opportunity in Asia, and are both launching their own funds and buying stakes in established firms in Asia, at lofty industry multiples.  EQT bought Barings Private Equity Asia for an estimated 30% of AUM, and Dyal Capital Partners paid 35% of AUM for Korea’s largest PE firm, MBK (perhaps ~17 years’ worth of management fee sales at a 2% management fee).[xxii]  The wave of private equity capital coming to Asia from the West is being met by increasing domestic institutional allocations, coming from a tiny base relative to private market allocations in the West.  Interestingly, some relatively new categories of private market investing, especially private credit, private insurance, and private real assets and infrastructure, are being legalized by regulators and bucketized by domestic allocators for the first time in some countries.  We think that this wave of new private capital will provide a growing pool of marginal buyers for the portfolio companies of established Asian PE firms.  In the future, the US trend of small PE firms selling companies to large PE firms will expand both deal valuations and liquidity in Asia, in our view.  The launch of new allocation buckets will facilitate the diversification of these firms into new product categories, which in our view is perhaps the single greatest driver of PE firm enterprise value. 

The Valuation Framework for GP Economics

    A single product mutual fund manager with daily liquidity, in our view, does not have much enterprise value.  A private market firm with locked up capital to minimize redemption, liquidity, and vintage risks, multiple live products across vintages, multiple sub-asset class categories, numerous partners and fund managers, numerous LPs and LP categories, and a good track record in these strategies, is worth a significant multiple of future management fee related earnings (FRE) plus a lower multiple (to reflect uncertainty) of future performance fee/carry related earnings (PRE), plus their book value (which tends to be harvestable net assets, primarily their net cash plus investment in own funds – GP commit).  Investors in GP stakes and listed PE firms are entitled generally to all of the FRE (invested generally in a mix of new fund seeds and dividends), and a portion of PRE, as well as the lion share of future gains on own-fund investments.  Listed private market firms in our markets tend to be valued and written up by bloggers and scant sell-side investors, as being worth only a discount to their book value – essentially providing 0 value for the enterprise – 0 value for future FRE and 0 value for shareholders’ take on future PRE. 

    AUM multiples are a less specific measure of value but can be a more comparable measure across firms at different stages of development.  Management fee profitability (FRE) tends to be achieved with scale within one or more fund categories as they get institutional traction.  PRE is typically chunky and driven by the exit cycle.  Listed PE firms in many of our markets do not yet explicitly report these metrics, but simply provide their financial statements.  Fund track record data is reported sporadically and differently across countries and firms.  In the absence of firm reporting and market understanding, listed PE firms in Asia tend to be valued as if they were weird family holding companies.  The economics to shareholders though are of course completely different.  One clear difference is that shareholders in PE firms earn dividends on positively asymmetrical and somewhat sticky fees.  Perhaps a less clear difference in theoretical value is that the cash generation of PE firms should be reinvested far more successfully than weird holding companies, because these are professional investors (hopefully, by definition!).  Discombobulated family-controlled holding companies in Asia are notorious for value-destructive non-core investments, whereas PE firms need to generate double digit net returns (and the GP generally gets returns gross of fees) in order to retain their raison d'être (and their compensation).  There are examples of firms in Europe and Latin America that scaled their funds, expanded reporting and IR to speak the language of private equity, and achieved much more reasonable valuations for their shareholders.

    Due to their smaller size and need to seed new product category funds with large GP commit, listed PE firms in our universe also have significantly higher own-fund investments relative to their market caps.  Much like the cash/market cap ratios of other listed businesses in our markets, we think this ratio is also high because their market caps are too low.  Most Western major PE firms have net cash and own-fund investments to market cap of <20%, and many of them use innovative borrowing methods to extract this value to the benefit of shareholders.  Some firms, like EQT, have successfully productized their own-fund investments by slicing and dicing underlying investments to be offered in gated funds targeting high net worth retail capital.  Many of the listed PE firms in Asia have net cash and own-fund investments to market cap greater than 100%.  We think that, 1) as Asian PE firms scale they can reduce the GP commit/fund size, and 2) the rise of private credit funds will allow them to directly unlock some of this value to shareholders.  In the meanwhile, shareholders get the compounding return on this own-fund investment gross of fees.

    The shareholders’ take on the GP economics is a clear risk area for investing in these firms.  The ‘smartest person in the room paradox’ cuts both ways.  Investing in a listed PE firm, you generally have smart, professional investors investing your shareholder capital, but this also presents the risk that the economic calculus is changed on shareholders (an extreme spin on the principal-agent problem).  Generally, we find that listed Alts, as part of the listing process, establish and publicize the portion of the earnings (including potentially PRE and gains on own-fund investments) which are paid to the team (vs. shareholders).  Some firms are listed because their domestic LPs appreciate the transparency this ensures and are invested in the listing – which should mitigate risks of shareholder abuse – their customers are invested in their stock.  There is also the risk of key partner fund managers leaving.  We find that these risks tend to be mitigated somewhat by scale, diversification (in its three forms), distribution channel development, and brand.  The flywheel of – positive fund performance facilitating: talent recruitment and retention, capital raising, and deal sourcing and dilligencing, facilitating: positive fund performance – combines with fund diversification and locked up capital – turning small firms into robust platform businesses typically somewhere in the $5-15bln AUM range, in our view.  As the flywheel gets reflected in market presence, these firms develop real brand power.  We once heard an endowment say that they thought this was a bad time to be deploying more capital to a private equity strategy, but they had to invest this round in order to ‘stay on the good graces of the manager.’  That’s real brand power – when a customer thinks a product is going to be bad, but they still feel the need to buy it anyway so that the company will like them enough to let them buy more product in the future.

The Benefits of GP Stakes

   GP stake acquirers, including Blue Owl – Dyal Capital, Petershill, and Blackstone GP Stakes, have generated impressive performance and grown to form another new category of private market investing.  They generally negotiate deals to guarantee a pass through of cash flows on certain portions of FRE and PRE.  As mentioned, this gives them a bit more ‘certainty’ as to cash receipts, but most listed PE firms have developed and articulated policies to enshrine the shareholders’ take on FRE and PRE as well.  Some GP stake fund positions are simply equity stakes.  Nonetheless, the gap between GP stake valuations in publicized deals, especially in strategically important parts of Asia, and the listed equity of private equity managers in Asia, appears to us to be extreme.  The valuation gap between listed Alts in the West vs. the East is also very significant, and reflects in our view both size but also greater market understanding of value.  We believe that PE firms in Asia will continue to have much greater growth tailwinds.  The reason, as in most cases of value dislocation, is that there are very different marginal buyers and sellers in the two different forums, with very different valuation frameworks.  We think that the retail traders setting the price of the listed PE firms of Asia, 1) do not really know how these businesses work, especially in newer private market categories like private credit, due to a lack of local comps and limited public market reporting and IR, and 2) they do not know that ‘what they are’ tends to be highly valued in private market deals in their home country and in listed entities in the developed markets. 

    Starting from unreasonably low valuations, we think the GP stake economics of listed PE firms have the potential to generate highly attractive returns.  We like the Michael Rees (founder of Dyal Capital Partners) quote from the Private Equity Deals podcast, Capital Allocators Episode #278, paraphrasing, ‘It is hard to model a portfolio of LP investments to outperform a portfolio of their GP stakes.’[xxiii]

    In addition to potential performance, there is an interesting synergy for investors looking at listed PE firms, especially in emerging markets.  GP stakes firms will often connect LPs in their strategies with the underlying managers, allowing investors to invest in their private funds while benefiting from the GP economics on their investment, and to leverage the institutional traction that investment can facilitate.  The same is true for listed PE firms, but for the larger Western firms, normal allocations would be a drop in the bucket compared to their asset level.  The smaller listed PE firms in Asia tend to have domestic institutional LPs only, and fewer product categories.  By investing in their funds, Western institutions can help scale existing and new product categories, to diversify their LP base beyond their home country, and to provide reputational capital and help network with other institutional LPs.  We think US capital can be particularly impactful, as the country with the most and the most sophisticated private market allocators.  Institutions can invest in the stock of a listed PE firm and then invest in their funds, creating their own wind in the sails of their GP investment.  The low market caps of undervalued listed PE firms in Asia, in our view, provides the potential for US institutional investors to generate compelling returns, while building strategic partnerships in the most strategic region for future PE growth.

Disclosures:

This report is provided for informational purposes only and is not a recommendation to buy or sell any specific investment securities. The information provided herein does not represent a solicitation or an offer to buy any security or to participate in any trading strategy. No offer or solicitation of the MIRI Fund will be made without the delivery of an offering memorandum, subscription agreement and other required documents. Before making an investment decision, potential investors are advised to carefully conduct their own research, to read the offering memorandum, the limited partnership agreement, the subscription documents and all other related documents and to consult with their legal, financial and tax advisors.

The information provided should not be viewed as a prediction or guarantee of future performance. No guarantees can be made about the success of any particular investment strategy. Potential investors should not assume that discussed investments or strategies were or will be profitable. There are numerous other factors related to the markets in general and to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of paper portfolio performance results and all can adversely affect actual trading results. Forward looking or ex-ante risk models may be used to describe estimated composite risk characteristics such as volatility (standard deviation of returns), VAR (Value at Risk), expected drawdown, and tracking error relative to the comparative indices. Ex-ante risk metrics are based on statistical assumptions using historical relationships between various factors and the holdings of the paper portfolio. These statistical estimations are subject to change and may not accurately represent the potential future risk of an investment, particularly as historical relationships between these factors change over time.

All investments include risk, including the loss of principal. The emerging equity markets present unique, potentially elevated investment risks, particularly when implemented through a concentrated portfolio. Despite potential attempts to mitigate these risks, no guarantees can be made about the potential returns or volatility of investment portfolios.  Readers should not assume that trading decisions made by MIRI Capital Management LLC in the future will be profitable.  Miri Capital and its managed funds may change its investment positioning at any time without notice.

MIRI Capital Management LLC is a US SEC registered investment advisor.  Opinions expressed herein are the opinions of Miri Capital Management and are subject to change without notice to any person.  All information contained in this presentation was prepared in good faith and is believed to be accurate, but Miri Capital Management LLC does not make any guarantees or representations of its accuracy.  Miri Capital Management LLC and its managed investment funds may trade in and out of discussed securities at any time without providing notice, subject to relevant market disclosure rules. 

Performance of emerging markets can be very volatile and the value of investments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results.

Catalyst

Value Unlocking and Recognition Catalysts:

We believe that the incorrect and shortsighted market perception of what Edelweiss is stands to be corrected directly through Edelweiss’ ongoing shareholder value unlocking program – which in our experience is unique not only in India but unique across the global emerging markets.  We hold Edelweiss promoters, Rashesh Shah and Venkat Ramaswamy in extremely high esteem.  Their openness to friendly shareholder feedback has been openly expressed in earnings conference calls.  Their focus on optimizing value for minority shareholders, and their flexible shareholder-value initiative, in our view, is exceptionally rare.  Their reputation among institutional investment allocators in North America and Europe who we have spoken with is exceptionally positive (it is an interesting market inefficiency / disconnect that their Alts fund LPs’ are some of the most sophisticated global investors and yet the market implied perception of the Edelweiss stock is so poor).  Rashesh and Venkat’s consideration of capital allocation first-principles, demonstrated in their confessed love of The Outsiders – by William Thorndike – is unique, in our experience.  The path to unlock value to benefit shareholders which they trod with Nuvama – first selling a minority strategic stake to the large Asian PE firm, PAG, then IPOing and div-en-specieing (passing directly to shareholders) the value of Nuvama was unique in India, and as mentioned in our Executive Summary, led to a very large return to minority shareholders.  Now, Edelweiss management is openly discussing doing the same with a much more valuable business, in our view.  They discussed in the August 2024 conference call that they should have a detailed value unlock plan by next (this) quarter.  The stock has begun to rally in recent weeks following the announcement, but in our view, the share price is still far from even an unduly conservative assessment of fair value.  A rising share price itself can catalyze further rises in the share price, as the market cap and liquidity of Edelweiss has been rising above minimum thresholds of certain indices and public institutional investment funds in India. 

We think very highly of the value-unlocking approach they demonstrated with the Nuvama strategic sale followed by the IPO and div-en-specie.  This approach we believe has also been demonstrated to be a positive outcome for the underlying company, which can benefit from greater independence and alignment of interest between management and shareholders, and a greater shareholder voice through being a stand-alone, public listed company.  We believe these benefits could be significant for Edelweiss Alts – as the first-ever pure-play listed Alts manager in India.  We believe that the Edelweiss Alts IPO could help inspire other Alts fund managers in India to list, much like the case of early Alts listers, Blackstone and KKR in the US.

In their investment in their own Alts funds, and in their retained 14% holding of Nuvama, Edelweiss has $632mm in non-core, extractable value, which is roughly ½ of their current market cap.  In our view, we believe that part of this value could be used in a way that is highly value accretive to shareholders through a significant share buyback plan.  Edelweiss continues to use non-core value and cash generation to pay down corporate level debt, which we generally agree with.  Though, Edelweiss could use a relatively modest part of their cash and non-core investment value to conduct a share buyback which we believe would have an outsized impact on market perception.  A share buyback would be value accretive to all shareholders because of the extreme nature of the undervaluation of Edelweiss shares, in our view. 

Edelweiss has been an under covered and under the radar small cap stock that would benefit from an increase in sell-side research coverage, in particular to assess the fair value of Edelweiss Alts ahead of its potential IPO and div-en-specie.  We believe the local Indian market needs to better understand the real value of Alts managers’ platform economics, and the high enterprise value of Alts fund managers international comps, in Asia especially.

We believe that listed Alts present an interesting opportunity for large institutional allocators to invest in a stake in the listed equity of the manager (GP stake or higher), to then consider investing in their private funds (LP stake) – thereby capturing the GP economics of their investment, and in some cases helping to catalyze value of the listed equity.  The recent disclosure of the Abu Dhabi Investment Authority’s investment in Edelweiss (EDEL) listed shares may represent such a case, and we believe this could be an attractive approach for Edelweiss’ large North American pension fund investors as well.  This synergistic GP/LP investment strategy is employed by Wafra, and other GP stakes fund managers.