Known devil or unknown angel?

Instead of investing in start-ups, consider angel investments in public markets

The key reason why people become angel investors is to get better returns. Investors on an average expect around 12 per cent per annum from publicly traded equities; it is roughly equal to that of the Nifty returns. While this is better than fixed deposits and beats inflation, some HNIs want better returns, at least on on a part of their portfolio.

Angel investing is expected to give better returns, since this is arguably the most risky asset class. Anecdotal evidence suggests investors expect annualised returns in excess of 30 per cent from angel investing.

The expectation that such large returns are realisable is what may have led to the surge in angel investing in India. Many angels are successful new generation investors from IP-driven sectors such as technology or healthcare. They have the ability to give strategic inputs to the management of the companies they invest in.

While it makes great sense for them to do angel investing, for many others, this may just be a way of portfolio diversification and an getting an opportunity to earn higher returns.

Two scenarios

This article is for HNIs in search of higher returns. Instead of investing in start-ups, you can consider replicating an angel investment-like scenario even in public markets.

Consider what really happens in angel or pre-series A investing: you take a stake at pre-money valuations of anywhere from ₹6 crore to ₹15-20 crore. It is this ability to buy a chunk of stake at low valuations that really gives you the multi-bagger over a three- to five-year period.

For this, the risk you are taking is investing in a company which barely has any revenue — often just a few lakh rupees and which is perhaps three-four years away from reporting operating profits. In this period, there is a good chance that the company will shut down and your investment will be a write-off.

Now, consider how you can get a similar situation in public markets. As you are aware, the Bombay Stock Exchange (BSE) has more than 5,000 listed companies. These come in all sizes, and there are several hundred that fall in the category which we can call ‘angel shares’. Let’s define them as companies with a market cap of less than ₹25 crore.

Incredibly, almost 2,400 companies on the BSE are angel shares. This is 42 per rcent of the companies listed on the BSE! However, not all of them are traded frequently. So I ran a query to check how many of them were traded in the previous week. This again is a high number — 1,075 companies.

So that’s your potential investment universe if you want to do angel investing in the secondary market. And that’s not a small size at all. I put some more filters to see the quality of companies in this set of 1,075.

More than 200 were found to have annual revenues greater than ₹50 crore. And almost half of them are profitable. Around 15 per cent of these make an EBITDA (earnings before interest, tax and depreciation) margin greater than 10 per cent.

Spot the multi-baggars

As you can see, all these companies are not junk; there is some quality. If you are willing to put in effort to troll through data on these companies, you should be able to get one or two ideas per quarter which can be potential multi-baggers, and can give you angel-type returns of 30 per cent or more on an annualised basis.

If your only reason to do angel investing is to get higher returns on your savings, you might as well try listed angel shares.

However, it is important to appreciate the differences between the normal angel investing and investing in public angel shares.

In start-ups, you interact much more closely with the management, and may even have a seat on the board after you invest. In other words, access to information is much better before and after investing.

Available information will be lesser in case of public shares since you may have no access to the company and the board. Many small public companies are notoriously bad at sharing the real picture with minority investors.

Also, the focus in start-ups is on strong growth. Many public angel companies will be turnaround stories, though finding a growth story is not entirely impossible. Many investors don’t want to look at companies in stress; this class of investors may not favour public angel shares.

Easier exit

To balance these negatives, public angel shares offer the possibility of easier exit if you think your call is not working out. Overall, we think there are good reasons to look at public angel shares, if angel investing is something you are keen on.

However, hard work will be needed to find your multi-bagger. And, if a start-up investment sinks, you can blame the promoter; but if an investment in a publicly-traded share does not work out, you have no one else but yourself to blame.

The writer is partner at Wisdomsmith Advisors LLP, a financial advisory firm

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