White Paper | by Dalton Investments | 06.27.16
Anyone who worked in Asia before the 1990’s will remember that the Asian Economic Miracle was just that—a miracle. Nations recovering from war, revolution and the mass emigration of their most educated citizens pulled themselves out of poverty, one enterprise at a time. In a testament to their entrepreneurial spirit, the founders of these enterprises often faced great personal, financial and even physical risk due to underdeveloped credit markets or volatile politics.
As a result, there is an unprecedented amount of wealth locked up in Asian companies in which the founders or founding families maintain sizable stakes and an entrepreneurial zeal. Much of that wealth is now being passed to a second entrepreneurial generation. A recent Barron’s article reported that Asia’s ultra-rich are expected to pass along nearly US $1 trillion in the next ten years and US $3 trillion in the next 30 years. Barron’s also noted that the average age of Asia’s super rich is younger than the rest of the world, particularly in countries that are still growing their wealth, like India, which is Dalton’s newest investment market.
“The primary driver of wealth management in Asia, because they are so young, is really about maximizing wealth, and about asset management,” Barron’s reported.1
At Dalton, we believe that working together with the founders and owners of the companies we invest in, plus applying a private equity approach to public markets, is the key to any profitable investment. This requires a level of commitment and local knowledge that most investors lack. In India, for example, most foreign institutional investor holdings are in large- and mega-cap Indian companies. However, only 209 Indian public companies have a market capitalization of over US $1 billion. Of the 4,167 listed equities, 95% are nano, micro, small or mid-cap.2 The lack of institutional ownership means these companies are characterized by limited liquidity and have little sell-side research coverage. Many are still family owned and operated.
While other investors might see such family ties as problematic, as an owner-operated enterprise, we look at it as an opportunity. Companies that are founder operated or family controlled are usually looking to further improve. Working together with entrepreneurial investors, like Dalton, will help enable this development. We believe the key is to give the owners something they need: a better understanding of international finance and how to deploy their wealth in profitable new ventures. They are, after all, entrepreneurs.
As such, Dalton takes an entrepreneurial, private equity approach to our public company investments. We typically seek out companies where founders and management maintain controlling interests. For example:
- One of Dalton’s most successful India investments is run by third-generation family members who continue to embrace entrepreneurial growth and enhanced governance.
- In one Singaporean investment, the co-founders each own over US$100 million worth of company shares, thus aligning their interests with that of other external shareholders.
- At a Japanese investment, the founding family owns a 26% stake in the company, and the founding family’s matron CEO is aggressively driving the organization.
Because so many Asian companies are still founder or family operated, making time to meet and understand the personalities and their approach to business is vital. This requires commitment, local understanding and extensive travel by our analysts. Putting “feet on the street” has always been part of the Dalton methodology and remains one of our key strengths.
1Abby Schultz, “Asia’s Wealthy to Leave $1 Trillion Legacy,” Barron’s, January 15, 2015.
2IIFL research & Bloomberg. As of Q1 2016.