HBJ Capital Ventures LLP – A Brief • HBJ Capital Ventures LLP is a equity investment vehicle promoted by HBJ Capital which will act on the similar lines of Buffet Partnership firm/ Pabrai Funds by accepting funds from HNI partners and investing in listed/ unlisted equities. • HBJ Capital Ventures LLP is the forward integration to asset management for HBJ Capital which has an established presence in independent equity research with strong retail/ HNI/ Institutional/ Corporate client base. • HBJ capital’s strength lies in the strong set of passionate equity research analysts across India (Chennai. NCR, Bangalore & Pune) and its unique strength of picking small, mid and micro cap companies which are outside the investment radar of large institutions thus delivering strong returns when they get recognized in markets.
Established Independent Equity Research HBJ Capital has a strong Independent equity research back-bone which has helped theorganization to grow rapidly across various verticals. Credited with indentifying many multi-bagger recommendations like Camson Bio, SE Investments, Poly medicure, Sumeet Industries,Venky’s India, Parekh Aluminex, Sakthi Pumps etc much before the market recognized them.
Highlights of HBJ LLP• HBJ Capital Ventures LLP comes from the family of HBJ Capital which already hasestablished its equity research track record through Retail services (Multibagger, Penny stockspackage), Institutional services (FII, DII, PE/VC funds) and portfolio management track recordthrough its Offline PMS (Portfolio outperformed Sensex by a wide margin).• HBJ LLP offers partners the best way to profit from the India growth story and the growingimportance of the Indian equity markets over the next decade with the least frictional coststhrough its simple profit sharing mechanism.• HBJ Capital is a partner in LLP with a 50 Lakh Rs contribution along with re-investing a partof its profits to LLP and hence every action will be in the best interests of the partners.• Partners of HBJ LLP are bestowed with various value added services from HBJ Capital inaddition to the wealth created from investments and becoming a part of our growth journey.• HBJ LLP aims to act in the most transparent manner with strong disclosures and regularnewsletters to partners. It also aims to create wealth for partners by over coming the problemsfaced by individual retail investors which we have discussed at the later part of this presentation.
Inspiration Some of the most successful Investment Partnerships Buffett Partnership Pabrai Funds• HBJ Capital Ventures LLP has been conceived on the lines of Buffet Partnership and Pabraifunds. Our simple profit share model is inspired from these funds.• Important thing to note that both these fund managers had the confidence on their stock pickingand did not go for the usual fund management fee model. Buffet almost re-invested all his profitsinto the LLP, thus over a period of time making him the largest partner in his partnership.• All the general partners who were invested in these funds over the entire market cycle,generated good wealth for themselves over any other form of investment. We would aspire toemulate that record.
Buffet Partnership• Started in 1954 in Omaha with funds from close friends and family.• Started with $100,000, with Buffett contributing $100.• Followed value investing approach and strong business research.• It was a limited Partnership model. 7 limited Partners.• Between 1957 and 1969, the Partnership grew at a CAGR of 30%.• Rs 10,000/- invested in 1957 would have grown to Rs 3,00,000 in 1969.• No Management fee and on a profit sharing mode.• Annual Redemption.• 25% of the returns of the General Partners over a hurdle rate of 6%.• After dissolving partnership, acquired Berkshire Hathaway to use it as his investment vehicleand allowed his initial partners to be a part of his amazing growth journey.
Pabrai Funds• Based on the similar structure as Buffett Partnership.• Founded by Mohnish Pabrai – An ardent follower of Warren Buffett and famous as the author ofthe investment book “ The Dhandhao Investor ”.• Has been following Value Investing approach.• A $100,000 investment in Pabrai Funds at inception (on July 1, 1999) was worth $722,200 onMarch 31, 2007.• No Management fee.• Annual Redemptions.• 25% of the returns of the General Partners over a hurdle rate of 6%.• Pabrai funds intends to take large concentrated bets which suits the philosophy of, “Heads – Iwin big, Tails – I don’t lose much”.
Benefits of LLP Model• Limited liability of each partner • Tax imposed on 40% of the income according to the LLP act of 2008. of LLPs, rest 60% distributed to partners who pay the tax on that• Separate Legal entity similar to a amount. partnership firm with all the necessary regulatory approvals. • No double taxation of income.• Flexible profit distribution. • Minimal compliance level & cost effective model.• Flexibility of organizing Internal Management of LLP. • No restriction on the number of partners.• Few legal & Procedural requirements. • E- Filing of all documents.• LLPs pay an effective tax of 30.9% • Easy Admission/Expulsion of Partner. against a 33.99% paid by private & public companies.
Advantages of LLP Structure• One of the major reason for the successes of the two funds (Buffet Partnership & Pabrai Funds)has been the simple profit sharing mechanism.• HBJ capital ventures LLP doesn’t charge any asset management fee or entry/ exit loads.• Simple model- 25% of the profits over the hurdle rate of 6%. Your Investment – Rs 100 Your Investment – Rs 100Returns of the HBJ Share in Profit Your Share HBJ Capital’s SharePortfolio in % % terms Rs 6.00 Rs 6.00 Rs 0.00 6% 0 Rs 7.00 Rs 6.75 Rs 0.25 7% 0.25 % Rs 10.00 Rs 9.00 Rs 1.00 10 % 1% Rs 30.00 Rs 24.00 Rs 6.00 16 % 2.5 % Rs 100.00 Rs 76.50 Rs 23.50 30 % 6%• HBJ Capital gets 2.5% only after returning 16% compounded growth, whereas assetmanagement firms charge irrespective of the returns they earn.
High Water Mark• You don’t pay a dime unless you earn your 6% compounded interest. If in case any losses, itwill be carried forward with the profit shared only after the partners earn money over hurdle rate.• Tables below illustrate the profit sharing model which we follow and its impact. Your Investment – Rs 100 Your Investment – Rs 100 Investment Duration – 2 Years Investment Duration – 2 Years CAGR Your Share Profit CAGR Your HBJ Capital’s HBJ Model If 2.5% fee Share Share - 10 % -10 % - 12.25 % Rs 12.36 6% Rs 12.36 Rs 0.00 6% 6% 3.35 % Rs 21.00 10% Rs 18.84 Rs 2.16 10% 9.01 % 7.25 % Rs 69.00 30% Rs 54.84 Rs 14.16 30% 24. 43 % 26.5 % Rs 125.00 50% Rs 96.84 Rs 28.16• It can be seen that, your returns will be higher in HBJ model instead of the regular 2.5% feestructure in cases where CAGR is less than 25%, thus incentivizing us to perform much better.This, motivates us to work hard to earn our share instead of the secured fee model.
Comparison with other Investment Opportunities Your share of Return under various schemes Annualized Return HBJ Capital Ventures PMS/Wealth Mutual Fund Investor on Portfolio LLP Investor Management 5% 5% 2.9% 3.43% 10% 9% 7.8% 8.35%• HBJ Capital Ventures LLP 0/25 Fee Structure (0% Management Fee, 25% Profit Sharing)• PMS/Wealth Management 2.5/2.5 Fee Structure (2.5% Management Fee per year, 2.5% Entry Load)• PE Partners 2/20 Fee Structure ( 2% Management Fee per year, 20% profit sharing)• Mutual Funds 1.5% Asset Management Fee per year + Some load/ charges of 0.5%
Advantage of HBJ ModelParameters HBJ Capital Ventures LLP PMS/Wealth ManagementSign up fee NIL 1% of InvestmentsManagement Fee NIL 2% of Investments/YearLLP Incorporation To be borne by HBJ 1000 INRProfit Sharing 25% of Profits 20% of ProfitsHidden Charges NIL 1% of InvestmentsBrokerage Very Low HighRegulations NIL HighCost of operation Extremely Low HighSEBI Registration Not Required RequiredCompliances Low Very HighTransparency Very High NILHidden Charges NIL High
HBJ Capital Ventures LLP Managing Director Principal Principal PrincipalResearch Research Research Research Research Research Analyst Analyst Analyst Analyst Analyst Analyst• HBJ Capital Ventures works in the above structure with three principal fund principals whosource ideas from 6 research analysts.• Best people in the organization will be part of the LLP principals and the performance of eachof them will be constantly monitored every year.• Principals have large performance incentives linked with the fund returns and thus aremotivated to creating wealth for the partners.• HBJ’s strong in-house research helps in stock picking to a large extent.
Investment Philosophy Sustainable & Scalable business model Strong Value Ambitious, coupled with Qualified & Companies Growth Experienced Prospects Management Sound Financials & Attractive Valuations• We see investing as, buying into a business and most of the research is on the businessoperations of the company and ability of its management. We buy for long term and don’tspeculate or trade in our investments.• We evaluate the financial performance of the company and the historical performance of themanagement and its attitude to minority investors. We do both primary and secondary research.
Our Vision• Our vision is to generate wealth for our partners through alpha investing, where the reward ismuch more than the risk taken.• We aim to outperform the market returns significantly over the long term.• We hope to create a strong platform for retail investors to invest in equities and create wealth.•We wish to overcome the short comings of retail investors like emotions in investing, noprofessional support, no time to analyze companies/ markets, not being able to follow up oninvestments, converse with managements etc.• We aim to run a very concentrated portfolio of 10-12 stocks where our conviction level is highand which meets our internal standards of assessment.• Biggest requirements to make money in markets is not intelligence, it is emotional control.While an individual investor has several emotional urges, in HBJ LLP we have a set of processeswhich helps us to tide over irrational decisions and maintain the investment discipline.• We also have the flexibility to invest across sectors, market caps, themes which restrict mutualfunds and we also have better control of the flow of funds, thus earning better returns.
Pro- Active Investors• HBJ Capital does due-diligence before each investment through both primary research (concallwith the management, speaking with suppliers, distributors & competitors) and secondaryresearch (data from AR’s, web, industry news etc). HBJ’s Institutional arm helps us to get intouch with the management to understand their vision and get our queries cleared.• HBJ LLP unlike a retail investor will play a role of an active investor, constantly in touch withthe management about major decisions affecting share holders and monitoring the performanceof the business operations, industry landscape etc.• We strongly follow-up on each investment by analyzing the quarterly results of each companyin the portfolio and check if there is any change to the initial assumptions which we had duringinvestment. We are pragmatic and non-emotional about our investments and act in a rationalmanner, thus benefitting the partners.
Highly Transparent• HBJ Capital Ventures LLP will follow highest transparency with its partners by sending amonthly newsletter with adequate details like market conditions, portfolio performance, existingpartners, NAV performance with SENSEX etc.• We will also mail our partners the Investment case report of each company in the portfolioonce we finish buying and the quarterly result update of each company in the portfolio. Additionand redemption of funds will be transparent on the basis of the latest NAV.
Value Added ServicesAs the initial partners of HBJ Capital Ventures LLP, they are eligible to valuable services like,• All LLP Partners will be recognized as platinum members with life long membership of allHBJ Services which in itself is a huge savings with the total worth of all packages per year isover a Lakh rupees. Just do the discounted cash flow and find the present value.• We would like to make each of our LLP partners, a part of our family going forward by givingsome shares of HBJ Capital to LLP at nearly free of cost, so that LLP partners will be a part ofour growth story.• Other value additions included for our active LLP investors who also help us to increase ourfund size is to act as a independent financial advisor/ family office concept where we help you inallocating your financial investments amongst equity, debt, cash, gold and real estate. Our expertswill help our LLP Partners to select the right kind of insurance product, better tax planning etc.• These value additions are additional to the platinum services of - KYC one 2 one discussions/month, Networking members of HBJ Cap, 2-3 Index trading strategies/ month, Millionaire clubmembership, Exclusive access to previous recommendation’s, Invited to HBJ Cap’s AnnualMeeting, Market outlook report (Quarterly), IPO advisory services, Dedicated Analyst, Responsetime of < 24 Hrs, Regular Portfolio tuning/ Health Check etc.
Terms & Conditions• Annual Redemptions.• New Partner’s cannot be added once the fund closes.• No managerial remuneration for any partner.• HBJ Capital will be eligible for 25% of the profits of the other partners over the hurdle rate.• 6% Hurdle rate.• Minimum Lock in period of 1 year.• Fund Raising as and when appropriate, with the first right to the existing partners on the basis ofthe latest NAV.• Existing partners can increase their funds only during the fund raising process.
FAQ’s• Why HBJ LLP ? - Equities are the best performing asset class over the longer term and everyone accepts thefact. But still most people lose out in equities, while a few smart guys win big. This is the mainreason for the low equity exposure of Indians in equities. Smart money wins big in stock marketsat the expense of small retail investors who are emotional and don’t understand market cycles.Equities require much more of active involvement than asset classes like gold or real estate.Platforms like PMS/ Mutual funds have their own constraints and more than 70 % of them under-perform markets on a net basis. There is no active product in the market that helps to capture thereturns of equities over the longer term with low frictional costs like HBJ LLP. Thus professionaland smart management of money in equities with high transparency is the need of the day andHBJ LLP provides just that. Being a new division, we have the fire in the belly to grow the fund.• Why are others not operating in a similar model to HBJ LLP? - There are not many enterprising independent equity research companies and it is notpossible for an asset management company to operate in our model as they have several fixedcosts and to manage them, would need to charge asset management fee. In our case, our fixedcosts to run LLP is zero as our expenses are already capitalized since it is a forward integrationto our existing business. Thus we have a strong advantage being a equity research firm.
FAQ’s• In India, the general rule is 20% Profit sharing after a 10% hurdle rate, then why is HCVadopting 25% profit sharing after a 6% hurdle? -HCV is not charging 2% Asset Management fee as PMS firms or Mutual Funds. -HBJ Capital won’t earn a penny until the investors get an annualized return of more than 6%, while PMS and Mutual Funds start making money day 1 & are least bothered to outperform the markets. -For comparison on your share of return, refer Slide# 13.• What is the expected returns from LLP? Our internal target is to outperform the market by a significant margin of 5% compoundedover the long term. Stock markets are not linear and there will be negative years and years wherethe returns are in excess of over 100%, thus remaining invested over the entire cycle is requiredfor wealth creation. Over the cycles, Indian markets have returned nearly 18-20 % CAGR and wecan definitely expect this going forward.
FAQ’s• Will the Dividends received from the companies be distributed amongst the Partners? Yes, 75% of the Dividends from the portfolio companies will be distributed amongst the Partners proportionately, while HBJ Capital will retain 25% of the same.• Is the entire fund required at one go? Yes, the entire contribution has to be made before the fund closes.• What are the risks involved? Like any other equity investments, there are significant risks in the performance of theportfolio and equity markets in general. But with a pragmatic approach, we try to cut as muchrisks as possible and at the same time take calculated risks to earn returns for our partners.• How often are you going to disclose the holdings? Disclosures regarding the investments will be made on monthly basis through newsletters along with the investments made and their relative performance.
FAQ’s• How many stocks will be held under LLP? LLP will run a concentrated portfolio of 10-12 stocks where we have strong conviction and in the businesses which we understand. The same ensures greater returns and also helps keep a tab and maintain strategic partnership with the portfolio companies. We will also take into consideration sectoral composition, concentration risks etc.• How long will a particular stock will be held? There’s no specific timeline for investment duration in a stock, however most of the investments will be made from a long term perspective (greater than 1 year) which will also ensure long term capital gains tax benefits.• Has the LLP been incorporated? Yes, the LLP has been incorporated from Mar, 2011 and the present fund size and the detailsof the existing investors can be got from the latest monthly newsletter. Fund addition can be atany time and after a lock in of 1 year, partners are eligible to withdraw money if needed.
FAQ’s• What is High Water Mark? The High water mark ensures that HBJ Capital cannot charge a performance fee until the partner earns more than 6% annualized return. (Slide# 11) Example: If HCV loses 50% the first year and gains 80% in the second year, investors would have an annualized return of -5%. Even though the second year’s performance is above 6%, HBJ Capital cannot charge a fee as return is less than 6% annualized.• Can a company be a partner of HCV LLP? Yes, both individuals and companies can become a partner in HCV.• How are the Profits taxed in case of an LLP? 40% of the profits are taxed at an effective rate of 30.9% which is subsequently shared with the partners. 60% of the Profits are distributed amongst the partners and they pay the tax on their respective share.
Thank YouFor more details and queries,Mail Id- Info@hbjcapital.comMobile No- +91 9886736791