The risk of getting stuck in illiquid assets is not something that is limited to smallcap equity investing. Portfolio Management Services (PMS) providers and their wealthy investors are also vulnerable to that risk if they step into unlisted securities. This realization came to the fore once again when IDFC Hybrid Infrastructure Portfolio, the first portfolio offering for domestic retail investors under the PMS platform of IDFC Investment Advisors, offered to do in-specie distribution of Regen investment i.e. transfer unlisted shares of Regen to investor’s demat account. This unusual offer was probably the only way out for the portfolio manager who has been unable to exit the Regen investment a good 8 years after adding the wind energy sector firm to the PMS portfolio in 2011.
IDFC Hybrid Infrastructure Portfolio (HIP) was launched in 2009 with an investment tenure of five years i.e. till 2014. The tenure was extendable twice by one year at a time. The revised term of HIP expired in 2016. The investment objective of HIP is to invest in permitted securities/instruments issued by companies operating in the infrastructure space and endeavour to achieve risk-adjusted medium to long term capital appreciation.
The IDFC HIP over the tenure had made investments within infrastructure space in the listed and unlisted securities. It managed to exit all of them except unlisted securities of Regen Powertech Pvt Ltd (Regen). On its website, Regen claims to be the fastest-growing wind energy company in India in just seven years of commissioning its manufacturing facility at Tada, Andhra Pradesh. The company is reportedly promoted by the Hyderabad-based Nuziveedu Seeds group.
IDFC Hybrid Infrastructure Portfolio had invested in Regen in December 2011. Regen accounted for 13.3% of the portfolio. “You may recall from our previous communication that after the expiry of the term of the discretionary portfolio management services entered between IDFC Asset Management Company Limited with our investors, we continued to administer this position in Regen beyond the portfolio’ designated termination date on your behalf, without charging any management fees. As per the agreement, in case any security remains unsold, the portfolio manager may initiate an in-specie distribution i.e. transfer shares of the investment to our Demat account,” said a source, quoting an official investor communique sent by IDFC AMC recently.
Do remember that unlisted securities are typically illiquid because there is no ready market where investors can readily buy and sell such securities. This is why market regulator SEBI in its latest tranche of reforms for PMS has capped investments by PMS products in unlisted securities. From January 1, 2020, discretionary portfolio managers will be allowed to invest only in listed securities, money market instruments, units of mutual funds and such other securities/ instruments as specified by SEBI from time to time. Importantly, non-discretionary/advisory portfolio managers are not allowed to invest more than 25% of their AUM in unlisted securities.
IDFC Asset Management Company Limited (IDFC AMC) had a wholly-owned subsidiary – IDFC Investment Advisors Limited (IDFC IA). IDFC Investment Advisors Limited was registered with SEBI as a Portfolio Manager vide registration no. INP000002064. The High Court of Bombay has vide its order dated April 18, 2015, approved the merger of IDFC IA into IDFC AMC. IA now stands merged into IDFC AMC. Pursuant to such a merger, activities undertaken by IDFC IA (Portfolio Management Services & Investment Management of Venture Capital Fund) is carried out by IDFC AMC.
The development gives quite a few key lessons for PMS investors.
One, PMS investors are in no way hedged from bad investment risks. Duds in a portfolio will happen. If you invest in PMS for zero-error investing, your faith is misplaced.
Two, PMS investors should definitely understand the risks of their portfolio managers investing in unlisted securities.
Three, a PMS offering will always have some dud investments. Portfolio managers aim to hit a home-run with all investments, but that seldom happens. As a PMS investor, you should understand that such a trade-off is natural.
Four, PMS investors must understand the nature of the PMS product offering and realize the various risks even as they eye the rewards. Portfolio managers merely manage the risk on your behalf and it is you the PMS investor who always bears the risk as well the beneficiary of rewards.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument including PMS.