‘You will find out who you really are’: The thrill — and toil — of becoming an entrepreneur in finance

Welcome to Human Capital, an open exploration of the ideas and people moving financial services forward. In each edition, we feature a leader or rising star who's changing the game in his or her own way. "Finance is an apprentice business," one often hears in this sector. Here are some of the teachers. Click Subscribe above to be notified of future editions.

Imagine waking up tomorrow and, instead of heading to the office to continue working on the projects you've been tackling, for the stable of clients that your firm has nurtured, while relying on key colleagues and vendors, you sit down at home in front of a blank sheet of paper, a stale email account, and a silent telephone.

Welcome to the life of an entrepreneur.

That's the position that Sachin Khajuria found himself in three years ago. After two decades working his way up some of the largest global investment banks and private equity firms — among them Morgan Stanley, Merrill Lynch, and alternative-asset giant Apollo Global Management, where he made partner — he paused to remember a college science project. It beckoned him to start a new business.

Large companies can offer stability, resources, institutional knowledge, and more. Entrepreneurs who spin out of them leave all of that behind — especially in finance, where scale, brand, and relationships count for everything.

I first met Khajuria in 2017 as he contemplated what to do after leaving Apollo, toying with the idea of turning his college project into a money-making enterprise. After a source tipped me off to Khajuria's official plans a year later, he and I reconnected and I began following his efforts building Achilles Management, which reportedly has posted stellar returns since inception.

Recently we sat down over pasta and espressos in London's Mayfair district to discuss why he struck out on his own, the investment approach at Achilles in today's chaotic world, and what it has taken to achieve success as a new entrepreneur.

Below are excerpts from the conversation.

What opportunity did you see for Achilles?

The truth is it started at college. I was interested in a number of things — medicine, business, all the typical kind of “immigrant” professions. I read economics and focused on finance for my thesis, researching the behavior of mature equity and debt capital markets.

I developed this econometric model that would analyze not just volatility — often measured using standard deviation or options pricing — but the higher-order moments of distributions, in order to understand latent or underlying risk. That means the tails, the shape, how these features move over time, asymmetry, extreme events. And I put forward a hypothesis of why we’re sometimes seeing asset prices change in a way that people don’t expect, notwithstanding the pace and scale of electronic trading and size of capital flows.

Back in the ’90s, lecturers were still talking about capital controls and transaction taxes, so it was more a question of: As capital gets freer, are we seeing an increase in volatility or a decrease? Is this good or bad? And the surprising results were that volatility was declining in general, although sudden large-scale movements were happening more often. I found that higher-order moments of distributions were behaving in more complex ways. So, if there was a problem it could be a bigger problem than foreseen, and then there could be a big snap-back depending on certain factors.

That original thesis and the coding for it, which I had to learn at Cambridge from scratch, fueled the idea that if you can feed these sorts of models with enough data, they can also help you forecast the near-term future using AI. That’s why they’re more suited to public markets than predicting “I know what this buyout is going to do in five to seven years.”

My work sat on the back burner for over 20 years as I went to Wall Street, became an M&A banker, then an investor, and then one day finally had this opportunity to do something with it. And so I updated it, expanded it, coded it, tested it would work. Then I gave it what I call the ultimate test, which is putting your own money behind it and checking whether it could help me invest.

So it’s human and machine working together, not competing?

It doesn’t take any decisions, but it gives you analysis that help you take a decision. All the decisions are still made by a human being.

The machine can’t meet the managers or the sponsors or the brokers. The human is going to do all that stuff.

I’m not sure I’m ever going to be, like, an automated trader.

The model basically says, given these parameters, that particular position for you has this band of outcomes, including liquidity. And then you can act on it, supplementing what you believe yourself about the fundamentals, including management, and what your investment analysis suggests for different scenarios.

It was like a science project, so to speak, from college. As it’s fed with more data, it gives me more quality analysis. Generally, whenever it said ‘sell’ it’s been right, and whenever it said ‘buy’ it’s been right. It doesn’t mean it’s picked the highest time to sell or the lowest time to buy, but it seems to get the trends correct. And it’s quite versatile because it can be applied to debt, to equity, to preferred securities, to hybrids.

What I’m combining is private equity-style diligence — which is generally deeper than reading research reports; in private equity, you really try to understand the situation and meet a lot of people around it — with AI-driven risk modeling. I take that to come to the view as to, OK, I know I like this security in that capital structure, I think it’s the fulcrum or I think that’s the one with the biggest potential for asymmetric upside, but when do I do it and how do I execute the market entry and exit — and how wrong could this deal get?

We are looking at thousands of names and basically trying to be disciplined on price as to when and how to act. And that really is the crux of it. There have been terrific windows to buy and sell, although personally I am geared toward long-term investing, not trading.

It’s early days — just under three years — but the returns are solid. And it has a strong cash yield. So, I think what you’re doing is combining infrastructure-like or credit-like stability of distributions with the range of gains you would associate with private equity, but also getting some liquidity.

Now, you’ve got to make sure it’s sustainable. But so far it’s working out. I think the real secret is being rifle-shot and selective, because I think you can end up buying too much of the market the more you automate. You want to stay focused.

What is the investment approach right now? What opportunities are you seeing?

Price is key, so buy low relative to benchmarks of various kinds. Invest in higher-quality assets, or businesses that have the potential to be high quality. Partner with good management teams. All of these are value investing principles.

What I’ve found is that flexibility to pivot has been vital. Because you don’t have walls, moving between the credit and the equity and the preferred, or stepping away and realizing that in that sector it’s better to take an LP position because that firm does it better — that flexibility has been key to the investment approach. And the more complex the situation, the more dislocation, the more likely there are multiple sources of value. It’s easy to say just buy cheap, but is it cheap for the right reason?

A year ago, I said we were seeing a lot more come on the distressed register at the beginning of 2019 than 2018. That continued right through 2019, and it’s increasing into 2020. But trying to understand whether it’s too early or it’s too late, for that you often need to be flexible, because one instrument in the capital structure might be the right one at a particular time in the cycle of a company, whereas down the line it might be better to be in the equity.

So, I think the right mousetrap is to have multiple investment channels at your disposal.

What I’ve tried to develop is a flexible investment strategy that works through the cycle. It’s a disciplined equity investor when times are generally fine — like they still kind of are now — but when the music stops, you have an option on distressed, which you’ve already spent years analyzing in advance.

Recently, the wider market discussion has been: What’s your recession call? Which quarter? Which month? How is it going to happen? I think that, although that question has had a starring role, we need to get to the sequel, which is: Let’s assume the music does stop. How long is it going to be silent for? What is the shape of the next recession? How deep is it going to be? Do we have the same policy tools to combat the same range of possible scenarios that we had during the Great Recession and the financial crisis? (I’d say probably not, partly due to politics.)

I think that the politics is so much more fractured today, not just in the States and not just in Europe, but also in Asia — look at Hong Kong, and also the Middle East. The world seems more opaque, more divided, more unpredictable.

With populism and potentially either fewer tools or less powerful tools, can we start to put some structure and form around the shape and trajectory and the band of outcomes of the next downturn? This discussion two or three years ago was premature, and still today most of the commentary is about the recession call: When? Before the election? After the election? The day after the election? Two weeks after the election? When?

I assume it’s going to happen and — this is where the AI comes into it — am stress-testing stuff that we’ve bought and stuff that we haven't bought and saying, what do we want to buy, at what price, when the music stops? And how will what we’ve bought perform; i.e., should we be selling now? Sell all of it, or just some? We are doing this work in multiple sectors, such as financial services — particularly insurance — TMT, and infrastructure.

A question for 2020, through the election year, is: Which sectors are being over-primed with cov-lite debt, which are frothy? Which ones are going to be the first ones to be hit, which ones are next? I think those questions are super interesting. Part of that is analyzing which sectors are likely to be durable through the cycle.

How did you decide to start something yourself?

I had a window of opportunity, and wanted to build something that was enduring, that would be intergenerational, and where a lot of my observations plus the original work from college would be current and relevant. It’s better to try when you’re still relatively young, have lots of energy and you can take that kind of risk.

Also, particularly in finance, scale is so important that I think it’s a real barrier to people doing it until they can get to a point in their careers where being able to achieve some scale — based on experience, based on relationships — becomes possible. The downside is significant.

How did you refresh your coding and technical knowledge after learning so much of it back in college?

From many sources: friends of mine who went into AI companies; who were with me at Cambridge; who developed video games and then went on to coding stuff for financiers; people at universities; friends who became economists. And of course formal training to get back into it.

Has it been harder or easier to pull off than you imagined?

It’s been easier — so far. I had no idea how the performance would be, and the solid performance makes everything so much easier. And of course you don’t know how sustainable it’s going to be, so the sustainable performance to date makes it easier still. But it’s still very early days — less than three years. The worst thing you can do is get ahead of yourself and take your eye off the ball.

The buck stops with you on all grassroots stuff: operational matters, due diligence, everything.

It’s asking yourself constantly, like, does this make sense and what happens if it goes wrong? Every call can become a big call.

What else does it take in order to pull off successfully?

I grew up in a family with a very strong work ethic, and I think that has been key. When you’re starting up a business, you can’t rely on an established brand. You can’t sit on the fence and let somebody else take a decision. You are actively saying yes or actively saying no — yourself. I think it takes a fair amount of resolve, and you need to be quite thick-skinned, because you’re going to hear ‘no’ in addition to hearing ‘yes, sure.’ I think that’s partly why it’s not for everyone.

You need to have built a broad and deep network of relationships with people, right across the board: management, mentors, advisers of course, peers, competitors. That has been unbelievably useful. Because you are now calling as you as opposed to ‘you at firm X.’ Most of the time, if you could guess the outcome of the call you’d probably get it right. But sometimes it’s surprising. Sometimes people you didn’t know as well are more helpful and people you do know that well are just busy or unhelpful.

You also want to have enough clear runway of mind space, to be able to think and create a mind map of everything that could happen and what you would do in every scenario. You have to be single-minded about seeing if you can get it to work. Remember why you started in the first place.

And obviously, you need some capital.

Finally, the grit. You have to really want to do it. You will find out who you really are, 100%.

If you are the sort of person who likes the idea of it, but at the end of the day you’re better off in the corner office with a stable salary, you will find that out pretty quickly when you have a blank sheet of paper in front of you and the phone doesn’t ring.

I will tell you one incredibly positive thing: I have learned so much. You are forced to go back to first principles, because nobody is ever doing the work for you. That’s a big litmus test for anyone. But if you can get it right, even if it takes a while, it’s so much fun and so rewarding.

Sure, there might be critics, especially as you start out — most entrepreneurs have plenty of those. Remember this: It’s not the critic who counts. The credit belongs to the person who is actually in the arena. You don’t want to be one of those cold and timid souls who know neither victory nor defeat.

What's your entrepreneurship story? Share it in the comments below.