Alternatives are showing upward momentum
There is a strong correlation between economic growth and emergence of investment products in any country to meet the growing needs and wealth creation aspirations of its people. We have seen these trends and shifts world over, wherein after the emergence of capital, debt and bond markets, alternatives have seen tremendous growth. Alternatives became even stronger after the global economic downturn in 2008, when individuals who were invested in traditional investments like stocks, bonds, etc. saw huge wealth erosion. Alternatives on the other hand have low correlation with traditional assets and rather trend in opposite directions. This resulted in increased popularity of alternatives as a key asset class used to diversify, spread out risk, and increase returns.
Alternative investments have moved from the periphery of the global investment landscape into the mainstream in the last 15 years. Currently, at over $13 trillion globally, alternatives constitute approximately 12% of the global investable market and are expected to grow to 18-25% by 2025. According to research conducted by Preqin, 79% of investors said they would increase their private equity allocation and 62% plan to increase allocations to private debt.
India’s alternative investment industry is underdeveloped relative to the rest of the world. Asset under management (AUM) for alternative investments is estimated to be $54 billion as of June 2020, which translates to less than 4% of India’s public market capitalization as of March 2020. The space is moving in the right direction and has grown from $14.8 billion in 2017 to $54 billion in 2020 i.e., 3.6x in 3 years and is expected to maintain the growth momentum in future years.
Retail is picking up
Globally, while initially the asset class was available only to sophisticated investors including institutions and the top riches, the space is now opening up for retail investors. Research done by Preqin shows a trend of retail investors seeking alternative sources of returns that can offer diversification from traditional markets. The research also shows that 35% of fund managers are expecting retail investors to account for a larger proportion of their AUM over the next five years. The segment has already started showing momentum with various startups in the West introducing innovative products to increase the participation of retail investors in alternatives. In India as well, similar trends can be seen. Retail investors currently have options to invest into various class of alternatives using the Alternative Investment Fund (AIF) route by participating in Private Equity/ Venture Capital Funds or angel/ crowd sourcing platforms for equity exposures in private companies, or by investing into products offered by fixed-income investment platforms for a higher risk adjusted rate of return.
Like India has shown faster adoption of newer technologies/ products in the past, be it during the mobile revolution from 2G to 4G or the digital currency revolution from paper money to mobile wallets and UPI or the current momentum in movement from ICE to EV; the same trend is expected to be in case of alternatives, whereby we expect the retail space to explode alongside Western markets. Our analysis tells us that while the affluent will pave early growth, the space will rapidly get democratized over the next 5-10 years wherein every individual with above average income would have an allocation towards it.
Some of the other key growth drivers include increasing average wealth per individual, higher proportion of young earning population, reducing preferences to invest in traditional assets viz. real estate, gold, cars, etc. by millennials and Gen Z, lowering interest rates, and volatile capital markets.
Within alternatives, there are options both on equity participation and fixed-income options, like Grip to earn a higher risk adjusted rate of return. We believe both these options would grow in the country, but we can expect a much faster adoption and expansion of fixed income category than equity for various reasons:
- Eligibility and ticket size: In case of equity investments there are requirements as to net worth and minimum commitment while investing through Private Equity/ Venture Capital Funds or angel/ crowd sourcing platforms. For Private Equity/ Venture Capital Funds, the minimum investment size is Rs. 1 crore and to be an eligible investor on an angel platform a minimum net worth of Rs. 2 crores and committed investment of Rs. 25 lacs over 5 years is required. Versus this, investment products like lease finance offer opportunities at much lower and more accessible ticket sizes. For example, an investor on Grip can start with an amount as small as Rs. 20,000 and doesn’t need to commit any further amount for investment unlike in case of angel platforms
- Risk: While both asset classes have associated risks but considering the fact that generally the fixed-income products are backed by certain collaterals, viz. invoices in case of bill discounting, tangible assets in case of asset lease, etc. the level of risk is relatively lower than an equity investment. Some of the other factors that help in reducing risk for fixed-income products are superiority of fixed-income/ loan products over equity in case of liquidation/ dissolution, recurring/ immediate cash inflows paid to the investor, etc.
- Tenure and returns: Exit timelines on alternative equity investments are generally long with no visibility on the value of returns. As compared to this, fixed income products have tenures ranging from 3 months to 3 years, and as the name suggests returns are also known at the time of subscribing to the product itself
Our investment in Grip
Grip has taken a leading position in alternative fixed-income products by offering 20%+ IRR to investors with an attractive risk-reward ratio. The company is targeting the top 300 million Indians having a consolidated wealth of $5 trillion, but negligible alternative investments exposure.
As can be seen from the above chart, currently alternative investments constitute only 0.4% (vs. 20% globally) of the total wealth and this population has the ability and willingness to invest in alternatives for increased risk-reward return. If we use global benchmarks, there is an immediate $1 trillion opportunity to be captured under the alternatives space.
Amongst all the options available within fixed-income alternative products, Grip is targeting the lease finance market which caters to the need of both lenders and borrowers and hence has strong supply-side and demand-side drivers.
Asset Leasing is a preferred model for target investors (supply side considerations)
As can be seen from the above chart, the asset leasing product helps investors strike the right balance between risk and reward while investing in alternatives.
On the demand side, we’re seeing a shift across industries to asset-light operating models. Some of the benefits to the borrowers on the platform are the ability to overcome limited access to traditional financing models, lower tax rates, and access to value-added services.
Founded by Nikhil Aggarwal, a second-time founder and ex-banker, Grip has put together a compelling business model and an experienced team. He had co-founded Chalo, India’s leading mobility startup for city busses, and was the COO of the company. Prior to that has worked in the IB arm of Morgan Stanley, India. Vivek Gulati, is the co-founder and has deep experience in running operations with companies like Chalo and Oyo.
We are very impressed by the execution carried out by the company, wherein it has been growing by more than 30% month-on-month with an AUM of Rs. 100 crores as of September 2021. Some of the other parameters viz. loans/ borrower, unique investors, investor repeat, AUM/ investor, etc. have demonstrated strong trends and continue to grow. The team has a clear thesis and deep understanding of the space, making it one of the best teams in the country to capture and build on this huge market opportunity.