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Concentrated single asset portfolios - Making sense of the Aditya Puri stake sale

Aditya Puri set to retire in October this year after a phenomenal stint was in the news over the weekend after he sold 95% of his holding in HDFC Bank, something that gave him a (well-deserved) 843 cr for building probably the best private sector bank in India.

While twitter was bubbling with potential reasons while he decided to sell so much, there was little meaningful insight that came out of it. So we decided instead to focus on the more important question - What are the parameters a person with an extremely concentrated portfolio needs to consider.

Let us first start by understanding the people who would generally have such an issue. Entrepreneurs and high level executives are most likely to have this unique issue, given that most of their wealth would traditionally be locked in the Equity of the firm they are working with. For some this is an accident (entrepreneurs who built a firm from the ground up will naturally have a lot of equity in the firm they've built), while in some cases it is deliberately given to align management interest with firm interest (CXOs will fall in this category).

However as most of you would know, there are risks in having a disproportionate amount of your wealth locked in a single asset, even if it is one you are closely linked with. Any adverse impact in that one asset can put over overall wealth back by quite a bit, something that you would not traditionally want. This brings us to the first factor.

1. Diversification: Diversification is often the most important factor, where the owned of the single asset portfolio wants to move away from the risk of owning a single asset towards a more balanced portfolio. This can be achieved directly via selling the asset and reinvesting the money elsewhere, or via having novel derivatives products on the asset base that mitigate the risk on the asset you own, and replace its cash flows with an alternate cash flow you would prefer. It is important to note that most firms explicitly ban the second option for their executives, because it defeats the purpose of giving them a stake in the firm.

2. Liquidity: While this is not too much of a problem in liquid publically traded stocks, it is a problem that can be faced quite acutely either by owners of private firms (startups et al) as well as promoters in illiquid public stocks. The liquidity limits how fast they can share their shares in a normal market, something that is often made worse in a bear market.

3. Tax considerations: The shares in these companies would often be acquired at extremely low rates, making the capital gains on selling these quite significant. Unless you have to one would prefer deferring tax payments as much as possible. This is especially true where the wealth is larger than you could use in your lifetime, and you would need a trust or alternate mechanism to pass in on to the next generation.

Knowing these drivers allows us to see decisions in a better light, drill down on the driver for the decision, and take our view on the action based on that.

Disclaimer: This is an educational post not meant as investment advice.


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