Idea Brunch with Nitin Prakash of Table Rock Partners
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Nitin Prakash!
Nitin is currently the Managing Partner of Table Rock Partners, an Orange County-based long/short partnership he founded in 2022. Before launching Table Rock, Nitin was an equity analyst at various funds including MIG Capital, Ashbay Capital, Ascend Capital, and Athena Capital.
Nitin, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Table Rock Partners?
Thank you for having me, Edwin! You have interviewed a number of very impressive managers and I am honored to be included. Just a quick disclaimer: nothing I discuss here is a solicitation or offer to buy any securities, nor is it investment advice. Readers should do their own diligence and consult their financial advisor.
I was in high school in Southern California during the dot-com bubble and a teacher of mine conducted a year-long stock competition amongst the students. My pick (CSCO) did well but it certainly did not win that year. I would wager a large percentage of the top performers from that year no longer exist, given how euphoric the period was. In the background, I remember my parents (neither of whom has a financial background) doing some hobby day trading, which was not uncommon given the animal spirits of that time. It did not turn out well for them.
That period piqued my interest in stocks, and I continued to follow the markets during my college years. I became more interested during my first year of law school. I took an unpaid internship with a value-oriented long-only fund during my second and third years. It was there that I really learned to analyze businesses as opposed to stocks. I also absorbed a healthy sense of skepticism that endures to this day. After that, I joined Ascend Capital in San Francisco. Ascend was a multi-billion dollar, low net, long/short equity fund. The fund was cleaved into different sectors, and when I joined there were several Sector Managers (basically Portfolio Managers) that did not have analysts. I was able to work with impressive people that taught me how to drill down into the drivers of a business quickly, how to short, and how to move on from an investment that went sideways. That period was fantastic from a learning perspective. Every day was like drinking from a firehose. After my two years at Ascend, I moved to New York and joined a value/special situations shop. As the sole analyst, I was fortunate to have been given a fair bit of responsibility. Most of my time was spent researching spin-offs, post-reorg equity, mergers and other situations that often prove to be interesting asymmetric bets when done correctly.
Prior to launching Table Rock, I was a dedicated short-seller at MIG Capital in Southern California. This was an educational journey. Short-selling is hard. Doing it full-time and being compensated on the performance of those shorts is even harder. I learned a lot about pattern matching for good short ideas, brought that enduring skepticism to bear on my analyses, and experienced the challenges of risk management, particularly during the 2021 meme stock era.
I have been fortunate to have good people take a chance on me at each stage of my career. Each professional experience provided a critical element that informs my investing process to this day. Because my path was non-linear in comparison to most others in this field (I did not do investment banking or private equity), I have always felt like I have something to prove. That motivation is durable fuel for me.
Two years into running your own fund how has it been going? What have been some of the positive surprises or unexpected challenges so far?
It has been an incredibly rewarding journey so far. The kindness of more seasoned investment managers has vastly exceeded my expectations. Since launching my own shop, I have had the privilege of meeting folks who have been at the helm of a fund for many years, and almost invariably they are generous with their time, offer valuable advice, and tend toward being encouraging rather than doomsaying. This is a tough industry, but the feedback I have generally gotten is: keep doing what you’re doing, do right by your LPs, and it will work out well.
The challenges have generally been as expected: outcomes in this pursuit are stochastic, and there are stretches of time that are painful. The operations side is less familiar to me and I do not enjoy minding that part of the shop.
Otherwise, I would say this endeavor has met or exceeded my expectations. I am blessed with incredible LPs and an incredibly supportive wife—these have been the two critical ingredients for getting through the more challenging weeks and months that one inevitably encounters when running a fund.
There are a lot of emerging manager long/short equity funds. What are some of the ways Table Rock differentiates itself from the crowd? From your past hedge fund experience, what have you found are the necessary ingredients for sustainable outperformance?
Our stated goal is to generate real dollar profit on the short book through single-stock shorts. This is a very different proposition than running a fully-hedged, market-neutral book, or shorting through ETFs or baskets. We do not view shorting as a tool to dampen volatility—we expect volatility to be a feature of our portfolio given the level of concentration (approximately 10 longs and 10 shorts). All short ideas must stand on their own. We endeavor to find profitable shorts through market cycles. Our bread and butter on this side of the book tends to be levered value traps. This means we are not scared off by seemingly low multiples.
In terms of ingredients for success in fund management, I think there are a few that are necessary but not sufficient. Willingness to hear the opposing argument on a particular investment is critical. We try to look at every prospective long as a short. By having this kind of “red team” analysis, we have saved ourselves some grief by not playing or by exiting quickly. Another key ingredient is sticking to your knitting. By that I mean, in nearly every market environment, there are fads. It can be incredibly tempting to play where it appears easy money is being made daily (the dot com bubble applies here, as does the housing boom in the early 2000s, and the biotech boom in the 2013-2015 era). These euphorias eventually end, often spectacularly. When they do, you will be happy that you stayed in your circles of competence, even if it meant underperforming for a period. As a former employer of mine once told me, “play your aces.”
Lastly, a lean cost structure is a critical driver of longevity, and longevity upgrades your range of outcomes. We keep our costs as low as possible—this gives us peace of mind which I believe enhances our ability to focus on generating returns. We do not have fancy offices, or Bloomberg, or even a website for that matter.
Recall I said that all of these ingredients are necessary but not sufficient. You can have all of these ingredients and still fail; that is just the nature of how competitive this business is. Having the above ingredients just raises the probability of success.
You have a lot of experience investing in online marketplaces. What’s the allure of marketplace businesses and how can investors tell if a marketplace will endure over time?
Having discussed shorts, let me hit on how we conceptualize the long book. We are hunting for quality, and ideally looking for oligopoly or “winner-take-most” businesses. The reason these attributes matter to us is simple: business is highly competitive, and margins are under constant downward pressure. Highly profitable industries invite more players, producing more competition, driving down profits. This is the beauty and the brutality of capitalism.
Paraphrasing a former PM of mine: businesses fall into two buckets: differentiated, or low-cost. If you are differentiated (think iPhone), your good or service is so critical that you can raise price, negotiate with suppliers to bring down costs, and invest behind your competitive advantage. If you are not differentiated, you are by definition a commodity, in which case it is vital to be the low-cost producer. You can then undercut your competitor and still sustain a decent margin, allowing you to consolidate more share. While we are willing to own low-cost commodity producers, our inclination is to own businesses with some identifiable differentiation. Within that bucket, if we can find businesses that operate in consolidated market structures (stable oligopolies), we are very interested in learning more.
Digital marketplaces are interesting because the best ones become “winner take most.” They can displace physical marketplaces because digital marketplaces have certain cost advantages, and more importantly, are unconstrained by geography. Supply and demand are national or even global. The key is to achieve scale rapidly by building out both sides of the marketplace simultaneously. This is very difficult to do well. In the digital realm, there could be multiple marketplaces which splinters both demand and supply. Over time, however, the best digital markets often converge into a “winner-take-much” or “winner-take-most” dynamic. Amazon is the best domestic example of this, capturing a huge percentage of e-commerce transactions. Uber is another, with a dominant position in the ride-share industry. Airbnb transformed the accommodations industry by becoming synonymous with “short-term rentals.” Yet for every winner there are losers. Etsy and Lyft are in more challenged positions. These win-lose dynamics persist when we look abroad as well. Shopee, MercadoLibre, and Coupang are dominant in their respective markets, and displacing them is possible but difficult.
To answer the question of what makes a marketplace business sustainable: it is context-specific. Norwest Venture Partners has written about this topic as well, and I think there is some overlap in how we think about it. In my experience, a few items are imperative: healthy, growing supply is first and foremost. For Amazon to succeed, they need virtually every product that customers would want to purchase. For Uber, they need an adequate supply of drivers everywhere to reduce wait times. For Airbnb, they need lodging options of various types across geographies.
Another critical ingredient is some kind of network effect. Network effects reduce customer acquisition cost and create lock-in. Uber and Airbnb excel at this: riders become drivers, guests become hosts. The network grows itself. When a certain region sees demand spikes, the supply lights up to absorb it. It is circular, self-perpetuating, and difficult to displace.
For the network effect to take hold, trust and safety are critical. Buyers of products have to know that what they are buying is as-advertised. When an Uber passenger gets into a stranger’s car, it is Uber they are placing their trust in. In some ways, trust and safety is the factor that will destroy a marketplace, or separate it from the pack of competitors.
From an investment standpoint, the best digital marketplaces are capital-light. The particular brew which makes for a compelling economic model is: an entrenched, dominant platform that takes fees on both sides of a transaction, whose end market is growing, and has limited capital requirements.
What are some interesting ideas on your radar now?
Let’s continue with the theme of digital marketplaces.