Sumeet Nagar and Akshay Mansukhani, the co-founders of Malabar Investments, were recent guests on the Behind the Markets show on Wharton Business Radio. You can listen to the full episode here. Malabar Investments is an India-focused investment firm founded in 2008. Their team invests for the long term in a concentrated portfolio of small- to mid-sized listed companies. Podcast hosts Jeremy Schwartz and Wes Gray talked to Sumeet and Akshay about their entrepreneurial journeys and investment style. I have included some highlights from the conversation below (mostly paraphrased, any mistakes are my own):

• Background prior to Malabar: Both of them did their MBAs at Wharton. Sumeet then worked at McKinsey, in their private equity practice. Akshay was with UBS, focused on structured products. His family founded Onida Electronics, which is a well-known consumer durables and appliances manufacturer in India. They both realized the most attractive investment ideas in India were in small and mid-sized companies that were under-researched and trading at a discount to intrinsic value given their growth prospects. For example, the top 10 names in their portfolio have generated >30% weighted average annual earnings growth over the last five years.
• Starting Malabar: The firm was launched in 2008, during the financial crisis. They like to joke internally that they are not good market timers. Was very tough initially because no investor wanted to allocate capital to a new manager in India focused on small caps. Had to keep costs low and focus on their process. In retrospect, it turned out to be an excellent time to be investing in the Indian markets. They found a number of great opportunities and valuation multiples re-rated as this quality was recognized over time. They have returned ~3x in 10 years while the broader market has remained roughly flat in US dollar terms.
• Some things they have learnt along the way: 1) Spend the time to understand and learn from your investment mistakes. 2) Build a team with people of different backgrounds and skill sets. 3) For new managers, get some external accreditation if possible. They were lucky to start out with a few reputed global investors, which they were able to build on. For example, their partnership with Oppenheimer + Close, who are investors in the fund and also serve on their board. They have done 50+ company visits on the ground with the Malabar team. Extremely valuable as partners given their experience.
• Macro outlook for India: Didn’t go through this in detail, but mentioned the financial system is relatively stable and conservative, the country has favorable demographics and is coming off a low base in terms of GDP per capita, and the political environment has improved (not just recently, but over a longer period of time since India opened up in the early 1990s). Overall, they think India will continue to be one of the fastest growing economies in the world over the next 5, 10, 15 years. Creates a strong tailwind for the companies they are investing in.
• Regulation for the alternative investment industry in India: The existing regulatory framework is fairly archaic; they can learn a lot from the US and Europe. Keep in mind, however, that the domestic hedge fund / alternative investment space is still very nascent. The alternative investment fund concept only came about only a few years ago and they were one of the first funds to get a license. Through that process, they started interacting with the Securities and Exchange Board of India (SEBI). Have found them to be quite an open-minded organisation, thinks they are heading in the right direction overall. 
• Investment style: They are long-term, value-oriented investors. Growth is a component of value. They are looking for profitable growth that doesn’t consume a lot of capital. Also focused on the sustainability of the growth. They run a concentrated portfolio and therefore spend a lot of time researching each company that goes into the portfolio. Will speak to a company’s competitors, customers, distributors and suppliers. Similar to a private equity due diligence exercise. Finally, the quality of management is critical. In most cases in India, the family that owns the business is also running the business. They will look at management’s track record in terms of capital allocation, treatment of minority investors and so on.
• Investment example: Big opportunity in air travel; less than 10% of the population has taken a flight. They don’t want to invest in airlines, but the luggage makers are a good way to play this consumption theme. Another thing you will notice in India is there are lots of two-wheelers on the road. In fact, India is now the world’s largest two-wheeler market. It is very difficult to carry anything on a motorcycle or scooter except a backpack. They invested in a company that makes both luggage and backpacks. The top 3 players control ~90% of the market. This is the #3 player. Company underwent a management change, which was a positive catalyst. Entry valuation was ~1.5x sales. Margins were very depressed at the time but the business benefits from operating leverage as it grows.
• How they spend their time: When Akshay first joined Malabar in 2009, they were a small team and he spent most of his time in the investment side. As he was coming in from the US, there was also some readjustment back to doing business in India. Today, he spends about half his time on investing and and half his time on business development. They are now a 12 person team. It’s a juggling act managing the team, your investors and the owners of the companies they invest in.
• Advice on starting an investment firm: Just do it. The cost of failure is relatively low as you can always go back to working for someone. One helpful piece of advice Sumeet received was to forget about all the constraints. If there was nothing else, what would you be most excited to do?