The most famous argument against active portfolio management compares the investment industry to the game of tennis. And it’s not flattering.
In his 1975 treatise on the subject, Greenwich Associates founder Charles Ellis described professional tennis as a winner’s game, where precision moves and skill decide the outcome. Amateur tennis is a loser’s game, where the smartest strategy is to simply avoid mistakes and let opponents defeat themselves through unforced errors.
The idea is that even as the overall economic pie increases in size, the investment industry is growing ever more crowded with skilled and informed practitioners. As a result, it has become less feasible to exploit a true edge, and the overripe gold rush has effectively turned portfolio management into amateur tennis. Don’t go for a smash; just keep the ball in court.
The theory is strictly academic and metaphorical – until it isn’t. AVCJ put the question to Uday Garg, founder of India’s Mandala Capital and one of few in the global private equity industry with experience playing world-class competitive tennis.
Garg was ranked number-one junior in India, played in the Junior Davis Cup, and competed against Grand Slam champions Andy Roddick and the Williams sisters. So, when he switched from tennis to investment, did he feel compelled to start playing a loser’s game?
“The people who are consistently winning at the top all come up with something new to elevate their game. Pete Sampras’ second serve was faster than his first. Everyone thought the second serve was conservative. Now everybody’s second serve on the [ATP] Tour is like a weapon,” Garg said.
“If you just do what everybody else is doing in investing, you’re never going to generate special returns for your investors. You can see that in most industries. The people who are doing well stepped out of their comfort zone and innovated in some way, and it looks normal now.”
In fact, Garg’s career in private equity has deeper roots in family than sport. His grandfather, B.R. Barwale founded global seed company Mahyco and is a leading figure in the history of Indian agribusiness. In 1998, Barwale received the World Food Prize for “transforming the face of Indian agriculture,” through access to high-quality seeds.
Garg is the only person in his family without a science background, but he brought his interest in finance to the food and agriculture space in 2008 with Mandala, a returns-focused private equity firm with a strong impact agenda. His grandfather’s commitment to the welfare of farmers was the fundamental inspiration.
After graduating from the University of Pennsylvania’s Wharton School – where he played Division I tennis – Garg tried his hand in a few domains. He did commodity trading and macro trading at US hedge fund Amaranth before managing special situations portfolios in Eastern Europe for Altima Partners, a UK-based Deutsche Bank affiliate.
By 2006, Garg was helping manage a USD 1bn global farmland fund that Altima had raised on the back of a high-minded but arguably unfocused Malthusian food crisis thesis. This is when the blueprint for Mandala began to take shape.
“There’s room for that in every portfolio, but personally, I didn’t feel that it was really doingjustice to the theme. I felt like the action was in Asia, not simply, ‘Food demand is increasing, and there’s farmland next to me in the US. Let me buy that,’” Garg said.
“Even back then, I felt strongly that countries wanted to be self-sufficient in food, pushing their own agriculture ecosystems and knowhow. It’s not that they couldn’t do it. They just needed the right capital, teams, and government support – the right target sector push.”
Mandala was founded on megatrend tailwinds around changing climate and consumption patterns. In the developed world, demand is growing for healthier foods with cleaner, more transparent supply chains. In the developing world, demand is growing across the board, especially in terms of a shift from carbohydrates to proteins.
Food safety and food security in the context of climate change and geopolitical tension are complex overlays that underpin much of the mandate. In addition to India, Southeast Asia is becoming a core geography.
The key opening in this space for an active private equity strategy is in the fragmented nature of food in developing markets. Unlike in more advanced economies, agriculture is a major contributor to GDP in South and Southeast Asia, but this activity is mostly represented by small businesses that are inaccessible via passive investment channels.
Garg had an edge in his family contacts but has consciously distanced Mandala from Mahyco to avoid perceived conflicts of interest. Still, the LP base has consistently comprised blue-chip US institutions the likes of Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF) and University of Texas Investment Management (UTIMCO).
The main fundraising hurdle has been a lack of comparable operators. Food and agriculture was an established niche in venture, but LPs had no benchmark for buyouts. The challenge was compounded by the need to balance elements of emerging markets, technology, consumer, and real assets strategies.
“I was only 30 when I started out, just talking to companies, using some of my own saved-up capital to invest in a few things, getting a friends-and-family pool going, a few million dollars. It was tough to manage that kind of cash and do something real, but we just figured out a way to keep the lights on and show some ability and track record,” Garg said.
“If you have a blank slate, you do not do food and agriculture with an India and Southeast Asia focus. You do a generalist Asia fund. I wouldn’t advise anyone to do this unless they really want to do it. There’s easier money to make doing software, financials, or healthcare.”
The first fund closed at USD 120m in 2016, with Fund II launching later the same year and closing on USD 130m. The portfolios are compact; there are less than 10 companies across both vintages. Midstream and upstream enterprise-facing suppliers are preferred. Control deals have proven the most successful. Climate shock is the wildcard.
“Our companies tell us they’re seeing events that they have not seen in 50 to 60 years, back-to-back droughts, extreme flooding, anomalies in El Nino,” Garg said.
“There’s been stuff we could never factor into our analysis because you look back and say, ‘Worst-case scenario, this happens.’ Then, something even worse happens. These three standard deviation events have started to happen. The flipside is it’s forcing a lot of innovation.”
Sugarcane processor Godavari Biorefineries offers a case in point. Mandala invested about USD 15m in the company in 2015 and spent the first two years shepherding it through a string of droughts said to be the worst in 30 years. The government had kept sugar prices low despite the domestic shortfall by allowing increased imports. The entire industry was operating at a loss.
Mandala stepped in on several fronts. Most importantly, it invested further capital to support the business and encouraged a move away from sugar toward ethanol and speciality chemicals, which had fewer price controls. Godavari is now the largest ethanol producer in India and prepping for an IPO.
It’s worth mentioning that sugarcane is a water-guzzling crop, which inspired some climate-conscious innovation on the side. Mandala mobilised another portfolio company, Jain Irrigation Systems, to install drip irrigation technology at the kind of plantations that supply Godavari’s feedstocks. Another investee, non-bank lender SAFL, helped those farmers finance the upgrade.
Garg sees drip irrigation as a game-changer in the mitigation of climate change impacts on agriculture. In effect, the technology circumvents the problem of erratic rainfall by supplying water directly to the roots of plants, simultaneously minimising waste, erosion, desalination, and pesticide contamination.
“Think of watering your plants at home but instead of just using a hose, you drip the water straight on the roots extremely slowly,” Garg said. “The water savings are greater than 50% and it’s also very climate friendly because fertilisers and nutrients are sometimes mixed with the water, and the slow application of this water means less runoff.”
Fund III is now in the market with a target of USD 200m and has secured an anchor commitment. It is hoped to benefit from the shift of global capital away from China and related food supply chain changes, as well as increasing understanding of climate issues and agriculture as a buyout opportunity.
There’s also a fair amount of exit activity to point to. Mandala is on track to return four out of four structured investments made via debt-like instruments by December and two out of eight equity deals by June. Another equity exit is expected by year-end. There are two divestments in process, a trade sale and a structured buyback, both described by Garg as “very good multiples.”
Mandala’s sharpening impact credentials are also likely to play a supporting role in fundraising, even if it’s an incidental effect. The firm has spent the past several years devising its own formulae to clear up the murk around impact measurement. Some of these have received patents.
“There’s a lot of confusion in the impact space, and it’s become a lot about paying agencies to sign up to their reporting standards or becoming signatories to different agendas. I didn’t feel that that was solving anything. We’ve worked with consultants that felt we were not doing a good job storytelling, and I say, ‘We don’t want to do storytelling – we want something more black-and-white,’” Garg said.
“The only way is to show numbers, but even with numbers, it can be deceiving. So, we’re looking at what impact do you get per dollar invested, which most people don’t do. This is something you do because you want to, or because you think it’s good. It shouldn’t be a strategy to raise money.”