RATIONAL EQUITY – Category III AIF

Rational Equity is a fresh, new boutique investment firm aiming to provide high returns to investors with highly favourable terms for investors. Rational Equity CAT III AIF has a high skin in the game in their flagship fund – more than 50% of the total contribution will be from the investment manager. They are a fundamental long only equity strategy fund  with a sector agnostic & flexicap approach.

Rational Equity approaches its investment strategy with a distinct philosophy, which can be summarized in two main areas: Buying Philosophy and Holding & Selling Philosophy.

Buying Philosophy of Rational Equity:

1. Investing in Businesses, Not Just Stocks: Rational Equity views its investments as acquiring portions of businesses rather than merely trading stocks. The company remains committed to good businesses even in times of short-term underperformance, allowing time for improvement. However, they are also decisive in exiting businesses that consistently demonstrate a declining trajectory.
2. Practical and Realistic Investments: The fund, Rational Equity CAT III AIF, focuses on investing in businesses with reasonable valuations, a proven business model, and resilience to disruptions. They avoid overly speculative investments and ensure not to overpay with the mere hope of future valuation justification.
3. Margin of Safety: Rational Equity does not promise extraordinary returns every year but emphasizes investing with a margin of safety in valuation. They believe this approach is key to generating long-term value.
4. Backing Intelligent Fanatics: The company invests in what they term “intelligent fanatics” – exceptional leaders who are deeply invested in their companies and have a track record of outstanding performance.

Holding & Selling Philosophy of Rational Equity:

1. Benchmark-Oriented Performance: Rational Equity measures its success by its ability to consistently outperform the benchmark. The company commits to transparency in both prosperous and challenging times.
2. Long-Term Holding: The fund believes in the potential for high returns from long-term investments. The ideal holding period is indefinite, emphasizing the value of patience.
3. Strategic Selling: Rational Equity sells holdings for two primary reasons: either when the valuation significantly exceeds their intrinsic value estimate or when the company underperforms due to unforeseen factors. Investment decisions are not solely based on macroeconomic changes.

This philosophy reflects Rational Equity’s commitment to thoughtful, long-term investing, grounded in practicality and a deep understanding of business dynamics.

1. Multi-bagger approach: (1) Rational Equity bets on companies during their Rs. 500 Cr. to 50,000 Cr. market cap journey (2) Rational Equity look for companies that have higher chance of sustainably providing opportunities for high growth (3) Rational Equity looks for companies with high growth potential, in high growth industries or those with moats like brand, network effects of distribution, R&D capability etc. (4) Rational Equity enters when the valuations are low or fairly reasonable (5) Rational Equity especially looks for exceptional  leaders with skin in the game & great track record (6) Rational Equity exits after performance has been consistently poor, valuations have become unjustifiable, new unfavourable information impacting growth has been revealed
2. Intelligent fanatics: Rational Equity believes in companies which are run by “intelligent fanatics” – i.e. lead promoters who have skin in the game, have shown a track record of good performance , Are excellent capital allocators, deliver what they talk about in investor presentations & conference calls.
3. Debt & repayment: Rational Equity prefers companies which have low debt. On rare occasions, Rational Equity bets on companies which might still have debt but have lowered leverage over time
4. Valuation: Rational Equity believes in investing in companies which have low valuations and high potential to grow. Rational Equity doesn’t believe in overpaying for a company in the hope it will justify its valuation in the future through high growth 
5. Spikes: Rational Equity looks for the “McKinsey Spike” – one thing in the track record of the company’s performance that makes it stand-out. “Not everyone does everything brilliantly, that’s fine. Everyone should have something that they do the best, that’s their thing, that’s their spike”.