How To Discover Compounders In Growth Emerging Markets (GEMs)

During her recent interview with Tobias, Rashmi Kwatra, founder and CIO of Sixteenth Street Capital, discusses how to discover compounders in growth emerging markets (GEMs). Here’s an excerpt from the interview:

Tobias Carlisle: So your pitch deck describes Sixteenth Street as a long-term investor in Asian growth markets, and the way that you describe it, Growth Emerging Markets, GEMs. So why the focus on GEMs?

Rashmi Kwatra: I think it’s what I know. So again, I grew up in Thailand, and ASEAN as the trading bloc is called, or Southeast Asia, was home. I traveled off into Indonesia, to the Philippines, and then I have a South Asian heritage, so travel to India often. And my first job with Prince Street that you mentioned, I started as an analyst covering this region.

Rashmi Kwatra: So I was fortunate that some of the competitive advantages we talked and where I was placed in my first job to allow me to focus on these markets, they happen to be some of the fastest growing countries in the world. So over time, there was no need to look elsewhere, because the tailwinds and rapid economic growth we’re seeing in my region of focus offers us quite a lot of opportunities for long-term compounding.

Tobias Carlisle: So let’s talk about your philosophy a little bit. What are you looking for when you’re examining these stocks?

Rashmi Kwatra: So as I mentioned, we’ve already narrowed down these markets that are in earlier stages of development than say the US, Europe. So they have certain things in their favor, including a younger demographic population that’s still entering the workforce. So these countries are already growing at GDP growth rates of 5%, 6%, 7%, 8%. One of our markets is touted to grow almost 10% in the next couple of years. So we already have economic growth in these markets.

Rashmi Kwatra: Now what we’re looking for is companies that are well set up in these markets run by talented management teams, who can not only grow with the tailwinds that these markets provide but take market share from perhaps the public sector or less well-run companies and grow multifold over time. So it’s really important to us to find companies that have a long runway for growth, and then really run by strong management teams.

Rashmi Kwatra: In these markets one thing is for certain is there’ll be volatility, there’ll be changes in regulations, but a really smart management team and an aligned management team can often navigate that very well, so that you come out ahead gaining market share in industries that already have quite a lot of room.

Tobias Carlisle: How do you characterize your investment style, is it growth in a value framework? Are you looking for compounders?

Rashmi Kwatra: Yeah. Yeah, I think that definitely looking for compounders. We have to understand what are the potential of these companies to really be able to value them accurately. So we do a lot of work in really understanding, what’s driving these companies, or they’re more sustainable, or they number two and number three player only in existence because they allow them to be?

Rashmi Kwatra: Certain things that really, first and foremost, we try to understand the business model and the competitive advantages of this business model, and then we do a lot of work to value that. I mean, we will always get in at a price much lower than the intrinsic value, whether that’s a single-digit P/E, not necessarily.

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