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Where Do Millionaires Invest? Private Debt Will Grow Tenfold In 5 To 10 Years, Says Neo’s Nitin Jain

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Nitin Jain: Every asset class is cyclical. Fundamentally, some are short cycles, some are long cycles. One of the key fallacies of the market is that people value recent performance too much. There is too much of anchoring around the past three-year performance or sometimes even six-month performances.

I think private markets went through that and I think, especially in the unlisted space, there’s been a lot of excitement in the last one-and-a-half to two years.

But what has happened, and I will tell you something very interesting. It’s some math’s at the end of the day, it’s a little bit of behaviour, but a lot of it is driven by maths.

Just imagine companies are saying will not be profitable for the next five to six years, but will make profits after that. Brilliant companies. Companies driven by exceptionally high-quality promoters. Once the interest rates go up, what happens is the value of cash flow after seven years, eight, 10 years dramatically drops.

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It’s not just in India, but globally, every company, which was not profitable, but was projecting cash flows after five to 10 years, as the interest rates rose, have corrected by 30-40%. It has to, as interest rates moved from zero to 3.5% for every dollar. That is a mathematical correction that you need to go through just to discount the future cash flows. This is especially true when the markets go up, and more so when it go down as markets tend to overreact.

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That is what happened to private markets, too much euphoria. I still believe there’s a lot of future for these companies. But in this way, some of these companies were sold in the HNI market, particularly when the retail market was not good. I think at some level, the suitability of the client’s objectives vis-a-vis what you are advising has created a little bit of disillusion in the private markets.

I have seen these cycles many times, some clients did invest in private markets. Some of those companies have corrected but they will come back, some of these companies might or might not come back. So again, you have to discriminate companies, private market is a large asset class. Let’s have high quality companies, I am very convinced that we will do extremely well. But let’s say you are in companies which didn’t have the strength of the business, which did not have strong funding around them. Who knows how strongly they might be able to come back.

We will keep a watch in that space. There’s pain in the next three to six months. There’s going to be more pain and lot of people who might think that this is the end of it. But, where we come from, we feel it’s not over. Three to six months of enormous pain in the private markets and that will create the opportunity for us to identify some high-quality stocks.

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