Security Tokens: The next big trend which will revolutionize the Private Markets

by Sandeep Kumar

Keep up to date with the latest research

Understanding Security Tokens

Blockchain is one of the most rapidly growing digital technologies in recent history, and its revolutionary decentralized model is being adopted by a wide range of industries. With the total Security Token market crossing $1 Bn in total volumes in July 2021, the discussion around how security tokens can transform and enable access to otherwise inaccessible private markets has been growing. Security tokens are essentially digital contracts that are blockchain-based protocols embedded in the network for fractions of any existing asset, such as real estate, a car, or corporate stock.

When investors use security tokens, their ownership stake is recorded on the blockchain ledger. With their ability to demonstrate value, security tokens have the potential to disrupt traditional financial markets in favor of newer, more hybrid blockchain models. They combine the merits of blockchain technology and regulated securities market, offering a wide range of financial assets including fractional ownership opportunities which allow investors to trade even the most illiquid assets like private shares, real estate, art, and even esoteric assets like vintage cars.

Owing to these benefits, there has been increasing adoption of STO in both public and private markets, so much so that some expect it to even outperform the traditional markets in the next 5–10 years.

Evolution of STOs and their Growth

The idea of STOs evolved from Initial Coin Offerings (ICOs) which serve as utility tokens distributed to raise capital from investors. ICOs may even involve the use of virtual assets that are yet to be built on the ecosystem. Since the launch of Ethereum in 2014, ICOs were successfully issued for several securities till 2016. However, with its success, the number of scams in the ICO market also increased with about 80% of the ICO projects deemed to be a fraud. These issues led to the development of STOs as they provide a shield of compliance, regulation, and tokenization to digital assets transactions.

The roots for STOs were set up in 2017, and it started to gain traction in 2018 with a total of 28 STOs raising a collective value of $442 Mn during the year. As per PWC’s 6th ICO/ STO report, over $4 Bn was raised through 380 token offerings in the year 2020. Tokenization of assets and the subsequent market for STOs is expected to witness exponential growth in the future, growing at a CAGR of 59% during the period 2019–2030.

How Do Security Tokens Work?

Making a security token entails reserving and naming your token symbol, developing a token that can enforce regulatory compliance through programming, and minting and distributing the token to investors. When an off-chain traditional financial asset is represented on-chain, it becomes a tokenized security. Tokenizing an existing share certificate is a good example. An issuer creates a security token that represents a claim to ownership in a company. The issuer then creates a whitelist of wallet addresses (typically Ethereum) of investors who are permitted to purchase stock in the company or invest in the concerned security. All individuals on the whitelist must demonstrate that they comply with the restrictions for that specific security.

If you try to trade a security token with a counterparty, the Issuer will check to see if they are whitelisted. If they are, the transaction is completed. If not, it will display an error message and you will be unable to complete the transaction. This is possible through smart contracts, or autonomous contracts on the Blockchain, which give the ability to be automated and transacted with little cost and in a short amount of time. Security tokens, in contrast to the majority of other crypto assets, are not bearer instruments. Because anyone who obtains your Bitcoin private key has the ability to spend your Bitcoin, it is a bearer instrument.

The security token is an electronic representation of the security rather than the security itself, hence cannot be stolen. No one can transfer a token to their wallet unless it is whitelisted; otherwise, they would have gone through KYC/AML and you would have known who they were. Hence, security tokens are well secured.

Types of Security Tokens and their Acceptability

· Equity Tokens  The ownership of an item, like corporate stock or debt, is represented by equity tokens.

· Asset-backed Tokens — This is a blockchain-based token that is linked to a tangible or intangible object of significant value.

· Utility Tokens — Utility tokens give users access to a product or service at a later time. Companies can utilize these to raise funds for blockchain project development.

· Debt Tokens — Debt tokens are the equivalent of a short-term loan with an interest rate based on the amount borrowed by the company. Example — Steem.

How are security tokens transforming the private markets?

Due to limited access, opaque pricing, intermediaries, high minimums of $100K+, limited liquidity choices, time-consuming and burdensome legalities, and other factors, non-institutional investors are unable to have easy and direct access to high-quality private market investment possibilities.

Security tokens allow investors to buy, sell, and swap rights to shares of private corporations using digital tokens, overcoming the problems in the secondary market for private equity. It’s critical that it records, issues, and validates sales all at once. This benefits both existing secondary market investors and makes secondary markets more accessible to a wider group of investors. It ensures transparent ownership and pricing.

A digital token would allow an investor to sell security far more readily than actual shares in a startup (which require notarial acts or intermediaries). We’re talking about a type of investment that combines the safety and security of reality — owing to a stable value represented by a real asset — with the investment simplicity of the blockchain world, which requires no notary deeds or lengthy processes to manage securities, but only a digital wallet! Investing in private markets is as easy as in public markets.

Benefits of Security Tokens

· Improves accessibility to real-world digitized assets

With a total of $256 Tn in real-world assets available globally, asset classes such as fine arts and real estate have numerous opportunities to open up trading spheres and be traded easily and quickly with STOs.

· Enabling Fractional ownership

Security tokens can be used to raise cash for large-scale investments. The value of a costly art collection can be split down into fractions and distributed to a large number of investors using security tokens. The security token investors would benefit from the increase in the value of art collectibles. People can build their portfolios without having to spend a big sum of money since security tokens allow investors to acquire fractions of fine art or collectibles. However, semantics, such as dividing the value into fractional ownership, must be addressed.

· Provides Increased Liquidity

Liquidity is determined by the number of traders (sellers and buyers) in a particular market. Accelerating transactions and fractional ownership through asset tokenization has the potential to increase liquidity by allowing more people to enter the investment space and buy/sell at higher volumes. Security tokens increase liquidity by making it easier to buy and sell in a market or underlying asset that is not available or difficult to buy or sell. Security token offerings are a win-win situation in terms of overall liquidity when it comes to asset classes that were illiquid in nature.

· Transparency

The status of a security token transaction can be tracked from start to finish, and all parties involved have access to an up-to-date golden source of truth on-chain. With an up-to-date record, it reduces record-keeping disputes and the need for parties to reconcile.

· Reduces Cost

Security tokens aim to eliminate intermediaries and simplify investing for investors. Chainiumu, a crowdfunding platform, was created with the sole purpose of connecting investors to investors without the use of go-betweens. In the long run, this will increase accountability and transparency. With an STO, businesses can enable investment through tokenization. Because smart contracts can embed trading restrictions into a token, the cost of an IPO or other securities trading can be significantly reduced.

Major projects in the STO space

· Tezos

BTG Pactual, Latin America’s third-largest investment bank, and Dalma Capital, a Dubai-based asset manager, announced plans to launch security token offerings on the Tezos blockchain in 2019. According to a press release, the banks hope to “address a deal pipeline of more than $1 Bn for existing and prospective token issuances.”

· TZero

tZERO is a technology company whose mission is to democratize access to private capital markets. It is a subsidiary of Medici Ventures, Overstock.com, Inc.’s blockchain-focused wholly-owned subsidiary. tZero was created to provide more legitimacy and oversight to initial coin offerings (ICOs), as well as to allow businesses to create and issue tokenized assets for investors. tZero, unlike other decentralized blockchain platforms, has been designated as an alternative trading system (ATS) and is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

· Polymath

The platform’s primary goal is to assist traditional financial securities in integrating with blockchain technology. Polymath is based on the fact that tangible assets are being drawn towards being a part of blockchain technology, which is primarily powered by its native token (Poly). Polymath is made up of four core layers that define token creation and adherence to the operating guidelines. These include the Protocol layer, Application layer, Legal layer, and Exchange layer.

In general, the protocol layer is in charge of all platform computation. The application layer, on the other hand, allows users to generate their security tokens. Those who want to create tokens on the forum can get help from the legal layer. Finally, the exchange layer functions more like a closed-end KYC/AML accreditation, providing users with instant liquidity for their assets.

Developments that needs to be catered in the long run

· Wider acceptability

STOs will take time to gain trust due to the poor reputation of ICOs in the market. To be accepted by the mass, major financial institutions must vouch for STOs. This would take some time, even with the security of regulatory requirements. The time has come to impose regulatory requirements that will act as an excellent first line of defense and protect investors.

· Integrating systems and requirements

Companies will be responsible for developing data transport protocols and interfaces, as well as writing and maintaining the existing system architecture. This may necessitate the use of specialized skill sets, which will increase costs in terms of both human resources and system enhancements to interface with SSTO-specific blockchain technologies.

A glimpse of the future

It is clear that significant changes are already taking place in the realm of finance and investing, and many of them have the potential to be beneficial. This is especially true for people who are enthusiastic about blockchain technology and the opportunities it provides. Security Tokens combine blockchain technology with the requirements of regulated securities markets to facilitate asset liquidity and financial accessibility. These tokens are regulated securities that are issued in the form of digital tokens in a blockchain ecosystem. Through automation and “smart contracts,” the blockchain environment promotes securities regulatory objectives of disclosure, fairness, and market integrity, as well as innovation and efficiency. The security token market cap increased by more than 500% in 2020, and the best is yet to come for security token offerings. Securities, which are traded financial assets such as equities, debt, and more, can become even more effective by employing blockchain as a foundation.

– – – – –

This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Reinventing meat and cultivated proteins: Gauging the investor’s interest through sustainable investment products

by Sandeep Kumar

Keep up to date with the latest research

Overview and Evolution

The popularity of alternative meat products from Beyond Meat (NASDAQ: BYND) and others, as well as early regulatory permission for some cultured meat products, has sparked a flurry of investment in this nascent business.

Despite this enthusiasm, the business is still in its early stages and is mostly pre-revenue, with a number of growth obstacles ahead, including the need for clear legal frameworks, more economically viable products, and scalable technologies. As the traditional cattle industry tries to defend its market share from produced protein sources, providers will almost certainly encounter greater lobbying attempts.

Even while widespread adoption may be several years away, improving consumer sentiment, together with increased demand for more sustainable food choices, will undoubtedly boost investment in grown protein products.

The key industry drivers for alternative meat products industry

· Antibiotics and hormones-free: Industrial farming conditions can be unsanitary, resulting in sick animals who are frequently treated with antibiotics. Hormone injections can also help to promote muscular growth or, in the case of dairy, milk production. These therapies may have an impact on human health, such as the transmission of animal hormones to people or the development of antibiotic-resistant bacterium strains. Cultivated proteins are made in sterile conditions without the use of antibiotics or hormone therapies.

· Free of zoonotic diseases: Zoonotic diseases, such as COVID-19, can be transferred to humans through animal meat intake. Because it is produced in a controlled, sterile setting, cultivated beef is deemed safe from this risk.

· Ability to design and change nutrient profiles: Cultured meat manufacturers can change inputs to generate products with better nutritional value, such as proteins, amino acid composition, vitamins, and minerals.

· Food security: Cultivated proteins offer a potentially large new food source that isn’t constrained by livestock’s significant land, water, and food requirements. This is especially essential in light of expected worldwide population growth and corresponding food demand.

· Environmental advantages: Some people believe that produced protein is a better option for the environment than conventional animal production. According to a 2011 study conducted by the University of Oxford and the University of Amsterdam, cultured meat may be produced with only 4% of the greenhouse gas emissions (GHGs) and 2% of the area required for conventional meat production, while requiring 45 percent less energy. 16 Critics have noted, however, that the energy required to create grown meat may originate from fossil fuels, resulting in worse environmental repercussions than animal agriculture in some ways.

 Ethical ramifications: Some consumers, such as vegans, avoid eating meat because of animal welfare concerns. Because no animals are injured in the manufacturing of cultivated meat, it is considered an ethical advance.

The environmental and ethical advantages of cultivated meat are based on a one-to-one substitution for traditional meat. On the other hand, a single cow can provide hundreds of distinct products. For example, if cultured beef totally replaced conventional ground beef, demand for steak, leather, gelatin, and steric acid would remain unchanged, meaning that cattle demand would remain steady, albeit ground beef demand might shift to new markets.

Competitive Landscape and Market Mapping

Source: PitchBook

Investors’ Trust Growing with Market

Compared to the initial years when alternative meat was first introduced to recent years, the market has witnessed steady growth in VC funding from a single $25 Mn deal in 2012 to a total of $303 Mn invested across over 30 deals in 2020. While the annual deal count has nearly tripled in 2018, the average deal size decreased. However, it is expected that the fundings will increase in tandem with the growth in the industry. The first five months of 2021 have seen a surge in investment with over $772 Mn recorded. With this pace, it is expected that the funding activity will triple this year, as compared to 2020.

Source: Pitchbook

Investment trends suggest that the cultivated protein providers have received the largest share of VC funding. Those among the top recipients include UPSIDE Foods, Eat Just, and Modern Meadow. Each of them have received more than $100 Mn funding, individually. Besides receiving funds from VCs, cultivated meat producers have also started to gain trust of investors like impact investors such as AiiM Partners, impact angel investors including Richard Branson, and even large corporations such as Cargill, Tyson, etc. These large companies have started to realise the importance of the alternative meat and are engaging through strategic investments.

How are Incumbents Reacting to the New Alternative Meat Market?

Combining the benefits of plant-based proteins along with cultivated proteins have proven to have cost and scale efficiencies, without leaving a significant impact on nature. Apart from health benefits like low cholesterol and with a taste similar to real meat, the alternative meat sales reached over $1.4 Bn in 2020. This growth in demand justifies why the existing food companies are venturing into this domain.

Based on location, Singapore is emerging as a hub for cultivated meat and is attracting many companies primarily due to ease of access to funds and required talent, attractive regulatory environment and significant market opportunities in South-East Asia. Companies like Avant Meats, Shiok Meats, Aleph Farms, etc. are considering to set up production units in Singapore.

Challenges Faced by the Culture Protein Production

The alternative meat market is yet to realise its full potential. Despite its wide range of benefits, there are certain roadblocks that are restricting the fast growth of the market. The Cultured protein market has three stages of production — developmental scale, pilot sale, and commercial scale. Most companies are yet to access the commercial scale. Once it is able to attain commercialization scale, plant-based meat will be available at a cheaper price compared to traditional options. It is estimated that cultured protein would be 5x cheaper by the start of next decade.

Currently, these options are not widely available to the customers and still require further advances in R&D processes to ensure the growth of the sector. Food Tech startups are continuously evolving to generate cost-efficient alternative meat. It requires huge amounts of investments and specialised workforce to experiment with different techniques from the use of AI, to bioprocessing and 3D bioprinting. This can be taken care of through greater funding from investors. The median funding for early stage VC rounds in cultivated meat startups have gone up from $4 Mn to $9.5 Mn in the last three years. Companies are trying their best to make the alternative meat very close to the traditional meat in taste and texture so that they are able to fully replace the animal meat in the coming years.

A Nascent Industry with Great Potential

Environmental concerns with the regular meat industry, change in food preferences, health benefits, cost efficiencies are some reasons that are facilitating the growth of the alternative meat market. It is estimated that the market for cultivated food, including meat, seafood, dairy, eggs, etc., would reach close to $18 Bn by the year 2035, with a consumption of about 6 million metric tons. While this may be just 1% of the total protein consumption in the future, the market may witness high growth.

Currently, a huge part of the alternative protein production goes into research and development. However, as the market enters commercialisation scale, costs will come down. Studies suggest that by 2035, cell-based and plant-based meat alternatives will be 10x cheaper than the traditional animal products, and will allow families to save over $1200 in food costs. It is also expected that by next decade, companies’ revenue will also increase 100x for plant-based meat.

Although the overall consumption of plant-based meat is currently very less, the market shows no sign of slowing down. The sector is still in its nascent stage and companies can gain from grabbing the opportunities early, which would be possible only through sufficient funding support from investors.

– – – – – 

This article has been co-authored by Sargam Palod and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Why the crypto industry needs regulation and will it then become safer?

by Sandeep Kumar

Keep up to date with the latest research

 

Money or the currency system has evolved itself over the years. One such system that is raging these days is cryptocurrency. Cryptocurrency is basically a virtual currency that is generated and secured through cryptography, making it almost impossible to counterfeit. While the idea of such currency started to establish in the late 1990s, the first actual cryptocurrency came into existence in 2009 with the creation of Bitcoin. Presently, the global cryptocurrency market has hit the $2 Tn mark as of August 2021, and the market is only growing with more awareness and acceptability.

Features that make Cryptocurrency Unique

What makes cryptocurrency unique are its fundamental features. Let us have a look at these, before we understand the crypto market.

 Security — Cryptocurrencies are secured as they consist of cryptography codes. Each owner has a unique set of encrypted codes which are difficult to replicate. The blockchain technology ensures the integrity of transactional data and is an essential part of the system.

 Decentralised — It is not controlled by any central authority. This feature makes crypto immune to the old ways of government control and interference. The system of blockchain record-keeping maintains transaction records and keeps the network transparent.

 Irreversible Transactions — One has to be cautious before initiating crypto transactions as they are irreversible. Once the permission is granted, the transaction will be carried out completely. And due to lack of regulation, no organisation will be able to help in case of wrongly initiated transactions.

 Limited Supply — There are fixed, predefined amounts of cryptocurrency that can be mined. While some miners release a proportion of total supply to ensure price stability, others release all coins at once. With limited supply, the demand for each crypto determines its price. Hence, it can be quite volatile in terms of pricing.

Apart from the above features, Crypto transactions can be processed super-fast, and do not require any physical location, making it easy to use for the people.

Cryptocurrencies that are Leading the Market

Source: Statista

From just 66 crypto-coins, to more than 6000 in 2021, the growing popularity and advancement in technology has led to growth of several currencies. Out of vast number of options available, the following are leading the market presently:

 Bitcoin (BTC) — The first cryptocurrency created in 2009, by the pseudonym Satoshi Nakamoto, Bitcoin is the largest cryptocurrency in the world. With a market capitalisation of over $856 Bn, it has witnessed a growth of about 8900% in its price in the last five years.

 Ethereum (ETH) — With a market capitalisation of over $357 Bn, Ethereum is one of the biggest cryptocurrency. It is popular among users particularly due to its usability in crypto-goods and non-fungible tokens (NFT). Launched in 2015, Ethereum has seen a significant growth of over 27000% in the last five years.

 Binance Coin (BNB) — Founded in 2017, Binance Coin currently has a market capitalisation of over $70 Bn. It can be easily used to trade and pay fees on Binance platform which is one of the largest crypto exchange platform in the world. Since its inception, BNB’s price has risen by whooping 419000%.

 Tether (USDT)  Tether is a stable coin with a market capitalisation of over $64 Bn. It is the most consistent crypto-coin as it pegs its value to fiat currency like the US dollar.

Source: statisticsanddata.org

Acceptance Around the World

While most people buy cryptocurrencies to gain from price volatility through speculative investments, they have already started to gain recognition as a payment option in many companies across the world. From big firms like Microsoft, CocaCola, BMW to small businesses and even gig workers, across different industries have already started to accept crypto payments. In case of global companies, transacting in cryptocurrencies serves as an added advantage as they are able to dodge additional 2–3% cost they have to incur while making international payments. However, most businesses are dependent on crypto-exchanges that convert crypto payments into fiat currency, which then goes to the receiving party. Tesla’s announcement of accepting Bitcoin as a direct payment option is considered to be a big move in the favour of crypto acceptability. Such instances rally up the prices of the particular crypto coins.

To make crypto payments more accessible, Bitcoin ATMs have been installed at various places. The United States has the highest number of such ATMs. Compared with the rest of the world, the USA has the most number of businesses accepting crypto payments. In June 2021, El Salvador became the first country to accept Bitcoin as the legal tender. Athena Bitcoin, a provider of crypto ATMs, is investing over $1 Mn to install about 1,500 crypto-ATMs in the country. Such moves indicate the growing acceptability to the new form of currency system around the world.

Dark Side of Cryptocurrencies

Decentralisation is the most important feature of cryptocurrency. There is no official organisation that keeps a record of cryptocurrency. While this provides immunity from government interference, this feature has also led to some negative consequences. Due to lack of regulation and anonymity of transactions, it is used for dark activities and frauds. While the blockchain technology makes it difficult for third parties to access transactions, some hackers may be able to crack the code. Recent times have seen an increase in the number of such thefts. From $4.5 Bn worth of theft in 2019 to $1.7 Bn worth of theft in 2020, the value of crime has decreased but the number of crypto theft jumped by 40% YoY. In August 2021, hackers carried out the biggest ever theft of over $600 Mn in digital coins from token-swapping platform Poly Network, of which hackers returned about half of the amount within a couple of days. This shows the vulnerable side of digital currencies.

Changing Regulatory Scenario

Despite the negative consequences, several countries have started to realise the potential of digital currencies. As a result, governments and organisations are working towards changing the policy scenario to make the crypto market a better place.

The US Securities and Exchange Commission (SEC) puts cryptocurrencies under the securities category, on which security laws are very much applicable. The US is even considering strengthening crypto tax measures that will be beneficial for the government as well. On the other hand, China is trying to tighten crypto activities, primarily through crypto mining regulations. While the regulatory scenario across the world is still in its nascent stage, it is believed that clear regulatory norms would remove significant roadblocks for cryptocurrency.

Divided View on Cryptos — What does its future look like?

There is no doubt that the crypto market has seen significant growth since its birth. It has seen widespread growth in its adoption in various firms-big or small, across the world. And when big names like Elon Musk favour such digital currencies, it immediately rallies its prices to a new high. However, there is a divided view about cryptos among big investors. While it is gaining popularity, some of the big investors in the world, including Warren Buffett are against the idea of crypto, deeming it to be risky and worthless, primarily due to its distinctive features.

But at the same time, with the growth of blockchain technology, governments and organisations have started to realise its importance. Several governments have already started working on creating and amending policies regarding digital currencies that would make it a safer option for investors and will also curb the demerits associated with crypto.

– – – – –

This article has been co-authored by , who is in the Research and Insights team of Torre Capital.

Keep up to date with the latest research

Security Tokens: The next big trend which will revolutionize the Private Markets

by Sandeep Kumar

Keep up to date with the latest research

Understanding Security Tokens

Blockchain is one of the most rapidly growing digital technologies in recent history, and its revolutionary decentralized model is being adopted by a wide range of industries. With the total Security Token market crossing $1 Bn in total volumes in July 2021, the discussion around how security tokens can transform and enable access to otherwise inaccessible private markets has been growing. Security tokens are essentially digital contracts that are blockchain-based protocols embedded in the network for fractions of any existing asset, such as real estate, a car, or corporate stock.

When investors use security tokens, their ownership stake is recorded on the blockchain ledger. With their ability to demonstrate value, security tokens have the potential to disrupt traditional financial markets in favor of newer, more hybrid blockchain models. They combine the merits of blockchain technology and regulated securities market, offering a wide range of financial assets including fractional ownership opportunities which allow investors to trade even the most illiquid assets like private shares, real estate, art, and even esoteric assets like vintage cars.

Owing to these benefits, there has been increasing adoption of STO in both public and private markets, so much so that some expect it to even outperform the traditional markets in the next 5–10 years.

Evolution of STOs and their Growth

The idea of STOs evolved from Initial Coin Offerings (ICOs) which serve as utility tokens distributed to raise capital from investors. ICOs may even involve the use of virtual assets that are yet to be built on the ecosystem. Since the launch of Ethereum in 2014, ICOs were successfully issued for several securities till 2016. However, with its success, the number of scams in the ICO market also increased with about 80% of the ICO projects deemed to be a fraud. These issues led to the development of STOs as they provide a shield of compliance, regulation, and tokenization to digital assets transactions.

The roots for STOs were set up in 2017, and it started to gain traction in 2018 with a total of 28 STOs raising a collective value of $442 Mn during the year. As per PWC’s 6th ICO/ STO report, over $4 Bn was raised through 380 token offerings in the year 2020. Tokenization of assets and the subsequent market for STOs is expected to witness exponential growth in the future, growing at a CAGR of 59% during the period 2019–2030.

How Do Security Tokens Work?

Making a security token entails reserving and naming your token symbol, developing a token that can enforce regulatory compliance through programming, and minting and distributing the token to investors. When an off-chain traditional financial asset is represented on-chain, it becomes a tokenized security. Tokenizing an existing share certificate is a good example. An issuer creates a security token that represents a claim to ownership in a company. The issuer then creates a whitelist of wallet addresses (typically Ethereum) of investors who are permitted to purchase stock in the company or invest in the concerned security. All individuals on the whitelist must demonstrate that they comply with the restrictions for that specific security.

If you try to trade a security token with a counterparty, the Issuer will check to see if they are whitelisted. If they are, the transaction is completed. If not, it will display an error message and you will be unable to complete the transaction. This is possible through smart contracts, or autonomous contracts on the Blockchain, which give the ability to be automated and transacted with little cost and in a short amount of time. Security tokens, in contrast to the majority of other crypto assets, are not bearer instruments. Because anyone who obtains your Bitcoin private key has the ability to spend your Bitcoin, it is a bearer instrument.

The security token is an electronic representation of the security rather than the security itself, hence cannot be stolen. No one can transfer a token to their wallet unless it is whitelisted; otherwise, they would have gone through KYC/AML and you would have known who they were. Hence, security tokens are well secured.

Types of Security Tokens and their Acceptability

· Equity Tokens  The ownership of an item, like corporate stock or debt, is represented by equity tokens.

· Asset-backed Tokens — This is a blockchain-based token that is linked to a tangible or intangible object of significant value.

· Utility Tokens — Utility tokens give users access to a product or service at a later time. Companies can utilize these to raise funds for blockchain project development.

· Debt Tokens — Debt tokens are the equivalent of a short-term loan with an interest rate based on the amount borrowed by the company. Example — Steem.

How are security tokens transforming the private markets?

Due to limited access, opaque pricing, intermediaries, high minimums of $100K+, limited liquidity choices, time-consuming and burdensome legalities, and other factors, non-institutional investors are unable to have easy and direct access to high-quality private market investment possibilities.

Security tokens allow investors to buy, sell, and swap rights to shares of private corporations using digital tokens, overcoming the problems in the secondary market for private equity. It’s critical that it records, issues, and validates sales all at once. This benefits both existing secondary market investors and makes secondary markets more accessible to a wider group of investors. It ensures transparent ownership and pricing.

A digital token would allow an investor to sell security far more readily than actual shares in a startup (which require notarial acts or intermediaries). We’re talking about a type of investment that combines the safety and security of reality — owing to a stable value represented by a real asset — with the investment simplicity of the blockchain world, which requires no notary deeds or lengthy processes to manage securities, but only a digital wallet! Investing in private markets is as easy as in public markets.

Benefits of Security Tokens

· Improves accessibility to real-world digitized assets

With a total of $256 Tn in real-world assets available globally, asset classes such as fine arts and real estate have numerous opportunities to open up trading spheres and be traded easily and quickly with STOs.

· Enabling Fractional ownership

Security tokens can be used to raise cash for large-scale investments. The value of a costly art collection can be split down into fractions and distributed to a large number of investors using security tokens. The security token investors would benefit from the increase in the value of art collectibles. People can build their portfolios without having to spend a big sum of money since security tokens allow investors to acquire fractions of fine art or collectibles. However, semantics, such as dividing the value into fractional ownership, must be addressed.

· Provides Increased Liquidity

Liquidity is determined by the number of traders (sellers and buyers) in a particular market. Accelerating transactions and fractional ownership through asset tokenization has the potential to increase liquidity by allowing more people to enter the investment space and buy/sell at higher volumes. Security tokens increase liquidity by making it easier to buy and sell in a market or underlying asset that is not available or difficult to buy or sell. Security token offerings are a win-win situation in terms of overall liquidity when it comes to asset classes that were illiquid in nature.

· Transparency

The status of a security token transaction can be tracked from start to finish, and all parties involved have access to an up-to-date golden source of truth on-chain. With an up-to-date record, it reduces record-keeping disputes and the need for parties to reconcile.

· Reduces Cost

Security tokens aim to eliminate intermediaries and simplify investing for investors. Chainiumu, a crowdfunding platform, was created with the sole purpose of connecting investors to investors without the use of go-betweens. In the long run, this will increase accountability and transparency. With an STO, businesses can enable investment through tokenization. Because smart contracts can embed trading restrictions into a token, the cost of an IPO or other securities trading can be significantly reduced.

Major projects in the STO space

· Tezos

BTG Pactual, Latin America’s third-largest investment bank, and Dalma Capital, a Dubai-based asset manager, announced plans to launch security token offerings on the Tezos blockchain in 2019. According to a press release, the banks hope to “address a deal pipeline of more than $1 Bn for existing and prospective token issuances.”

· TZero

tZERO is a technology company whose mission is to democratize access to private capital markets. It is a subsidiary of Medici Ventures, Overstock.com, Inc.’s blockchain-focused wholly-owned subsidiary. tZero was created to provide more legitimacy and oversight to initial coin offerings (ICOs), as well as to allow businesses to create and issue tokenized assets for investors. tZero, unlike other decentralized blockchain platforms, has been designated as an alternative trading system (ATS) and is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

· Polymath

The platform’s primary goal is to assist traditional financial securities in integrating with blockchain technology. Polymath is based on the fact that tangible assets are being drawn towards being a part of blockchain technology, which is primarily powered by its native token (Poly). Polymath is made up of four core layers that define token creation and adherence to the operating guidelines. These include the Protocol layer, Application layer, Legal layer, and Exchange layer.

In general, the protocol layer is in charge of all platform computation. The application layer, on the other hand, allows users to generate their security tokens. Those who want to create tokens on the forum can get help from the legal layer. Finally, the exchange layer functions more like a closed-end KYC/AML accreditation, providing users with instant liquidity for their assets.

Developments that needs to be catered in the long run

· Wider acceptability

STOs will take time to gain trust due to the poor reputation of ICOs in the market. To be accepted by the mass, major financial institutions must vouch for STOs. This would take some time, even with the security of regulatory requirements. The time has come to impose regulatory requirements that will act as an excellent first line of defense and protect investors.

· Integrating systems and requirements

Companies will be responsible for developing data transport protocols and interfaces, as well as writing and maintaining the existing system architecture. This may necessitate the use of specialized skill sets, which will increase costs in terms of both human resources and system enhancements to interface with SSTO-specific blockchain technologies.

A glimpse of the future

It is clear that significant changes are already taking place in the realm of finance and investing, and many of them have the potential to be beneficial. This is especially true for people who are enthusiastic about blockchain technology and the opportunities it provides. Security Tokens combine blockchain technology with the requirements of regulated securities markets to facilitate asset liquidity and financial accessibility. These tokens are regulated securities that are issued in the form of digital tokens in a blockchain ecosystem. Through automation and “smart contracts,” the blockchain environment promotes securities regulatory objectives of disclosure, fairness, and market integrity, as well as innovation and efficiency. The security token market cap increased by more than 500% in 2020, and the best is yet to come for security token offerings. Securities, which are traded financial assets such as equities, debt, and more, can become even more effective by employing blockchain as a foundation.

– – – – –

This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Alternative Investment Funds – Supplementary Investments for Better Returns

by Sandeep Kumar

Keep up to date with the latest research

The growing popularity of AIFs

 

For several years, people have been investing their money into traditional public equities and debt securities. A concern from an investor’s point of view while putting their money in public equities is that the market is very volatile and it is difficult to achieve the first mover advantage, while the burden of tax remains a constant woe.   The desire for earning greater returns have started to shift investor’s attention to alternative asset classes. Alternative Investment Funds (AIFs) have witnessed a significant interest from investors in India. AIFs invests in a variety of asset classes including private equity, venture capitals, hedge funds, real estate, etc. by privately pooling the investors money. There are about 700 AIFs in India worth over INR 4 Tn in investments. Growing interest in such investment options has resulted in an impressive growth of 15x since 2015. Cumulatively, AIFs received investments amounting to INR 1.6 Tn, as of September 2021. With Indian markets witnessing a high growth and super speed at which startups are gaining unicorn status in India, such alternative classes are expected to be helpful in accelerating the investors’ return.

 

Categorizing AIFs- 

 

AIF pools money from sophisticated investors or HNIs, whether Indian or foreign. They can choose from 3 categories, depending on their preferences.

  • Category I – This category invests in social venture funds, SMEs, Infrastructure funds,etc which are considered socially and economically desirable by the regulators.
  • Category II – These include those funds that do not leverage or borrow, other than to meet the daily operational requirements. For example real estate funds, private equity, debt funds, or funds for distressed assets, etc.
  • Category III – Funds within this category usually involve diverse or complex trading strategies, such as investments in hedge funds. It may employ leverage through investment in listed or unlisted derivatives. 

 

Source: SEBI, Cumulative net figures as at the end of March 31, 2021

 

According to SEBI reports as of March 2021, out of the three categories, Category II has received the most amount of investments of about INR 1.4 Tn, where total amount for AIFs as whole is estimated to be over INR $2 Tn. Looking at the CRISIL AIF Benchmark report data, a positive trend is witnessed in the returns, particularly for category II and category III funds. Some of the best performing AIF providers in India are – Abakkus Asset Manager, Roha Asset Managers, Grik Advisors. Their one-year returns are much higher than the CRISIL Benchmark.

Source: CRISIL Alternative Investments Fund Benchmark Report, September 2020

 

How can alternatives complement a traditional portfolio?

 

While traditional investments cannot completely vanish from the scene, alternative asset classes offer a better compliment to the conventional investments as it allows investors to diversify their funds, while earning better returns. As a result, investors can add alternatives to their portfolios and it would enable them to earn better, risk adjusted returns. The type and proportion of investments into different assets depends on individual to individual, on the basis of their preferences. Also, It is important that investors consider reshuffling their portfolio from time to time, according to the changing market conditions.

 

Why Invest in Alternatives?

 

Diversifying one’s portfolio in alternative asset classes helps in minimizing the risks of the investors as returns are less volatile. This helps investors in achieving their long term financial goals. Even though AIFs may carry higher levels of risks, it provides  higher returns compared to conventional asset classes as it is not directly linked with the stock market. As a result, it can increase the value of the portfolio. For instance, investing in Category II of AIFs can offer double-digit returns through venture debt and also allows participation in equity upside, with the fixed return component.

With high growth businesses and booming markets, India is attracting investors’ attention from all over the world. While it is comparatively new, AIFs can provide a great alternative for high networth individuals. Returns from AIFs will continue to rise as the startup ecosystem in the country is at an all time high and shows no sign of slowing down.  

– – – – –

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

AgriTech Market — How Technology is Paving Way for Modern Farming?

by Sandeep Kumar

Keep up to date with the latest research

Significance of Technology in Agriculture

From traditional hand farming to use of tractors, high yielding seeds, and now to the use of technology such as artificial intelligence, sensors, robotics, etc. the scenario of the agriculture industry has evolved over the years. Agritech refers to the use of technology for farming that brings efficiency to the yield. It improves the farming process through various functions like analyzing weather, soil, temperature, etc. to not not only provide a large scale of production and profitability, but also focuses on the quality of the produce. In current times, special focus has been on using technology to ensure sustainable farming.

The world population is growing at an increasing pace and is expected to reach about 10 billion by 2050. As a result, there is a growing need to fulfill the demand for food. The Agritech market is projected to reach $42 Bn by 2027, growing with a CAGR of 12% from 2020–2027. It is estimated that the agtech market has generated approximately $280 Bn in revenue over the year 2020. Even with a single digit annual rate of growth, the market is expected to generate $345 Bn by 2025.

Key Industry Highlights

● Market Size: $19 Bn

● CAGR: 12% (2020–2027)

● Estimated Revenue: $280 Bn

● Deal Value: $6.4 Bn

● Key Players: AeroFarms, Provivi, Apeel Sciences, Agrobot, Prevenio, etc.

Agritech Gaining VCs Trust through Investments

The growing need for food, sustainable farming, and the need for automation has made investors realise the importance of the market. As a result, agritech is witnessing an increase in the investment activity, particularly since the onset of the pandemic which highlighted the vulnerabilities of the sector such as supply-chain breakdown, labour shortages, risk of infection,etc.

The Agritech sector has witnessed $1.5 Bn being raised across 153 deals, in just the first quarter of 2021. This has been the fourth straight quarter where at least $1.5 billion was raised. The biotechnology segment in agritech has absorbed maximum contribution from the VCs. Some companies within the segment that received significant funding include DNAnexus, Pairwise, Enko, with Caribou Biosciences receiving one of the largest deals of Q1 2021 equivalent to $115 Mn in its Series C round.

Source: Pitchbook

Acceptability Towards Agritech in Various Regions

Looking at different regions, North America is leading the agritech market. VC deals in the North American region have been more than 40% since 2014. In 2019, the region was estimated to have a revenue share of 38.6% of the market, followed by APAC and Europe. After USA, India had recorded the second-highest number of deals in agritech, with a total deal value of about $250 Mn in 2019. These trends are expected to continue as the governments are building infrastructure for rural development and making other such favourable investments that are boosting the agritech market in the region. Farmers in most regions have been resistant to change, however favourable results from the innovative products will ultimately motivate them to try them. In most nations, the growth of agritech has been comparatively slow as it requires huge amounts of R&D and investments. Despite these drawbacks, we expect the agritech market to receive greater acceptability from all around the globe as there is growing need for sustainable farming that can keep up the food levels with growing population without compromising on the environmental conditions.

Source: Agritech VC Deal ($Bn) by Region — Pitchbook

Blooming Opportunities for Modern Farming

Boosting Plant Growth through Pollination-Tech:

Pollination is the most important part of agriculture with about 90% of the flowering plants requiring it. The global pollination market size, which is estimated to be around $60 Bn in value, will prove as an emerging opportunity in the sector. Different types of plants require different levels of pollination. As the importance of pollination is realised, new startups are coming up with new techniques to facilitate artificial pollination through use of technology like IoT sensors, machine learning, lasers, etc. along with the development of rental bee colonies. Some companies working in this direction include The Bee Corp, ApisProtech, PowerPollen, Beewise, etc.

●Improving the Shelf Life of the Produce:

The longer distances and supply chain disruptions have put a special focus on improving the shelf life of the agriculture produce in order to reduce food wastage. The market size for post-harvest treatments is projected to reach $2.3 Bn by 2026, globally. While improvement in shelf-life of food products prove profitable for retail grocers, it is important to note that since each crop has different properties, unique treatments have to be formulated for each of them. This reduces the scope of adaptability of solutions. Some companies working to enhance shelf life of agricultural produce include Apeel Sciences, Hazel Technologies, Mori, etc.

●Solving Harvesting Challenges through Automation and Robotics:

Since harvesting is a labour-intensive activity, any shortage in labour could limit the operation capabilities of the producer. This has been a challenge in some areas, particularly during the pandemic. These challenges have paved an opportunity for automation and robotics in the agriculture market. The global agriculture robotics market is estimated to be $5 Bn in 2020 and is projected to reach $27 Bn by the year 2026. While the harvest robotics is still budding with most companies in pilot and pre-commercialization stages, the use of technologies like computer vision, 3D perception, and artificial intelligence (AI) is expected to drive the market through its use in both indoor and outdoor farming. Some companies that are engaged in building harvest robots include Tortuga AgTech, Agrobot, Tevel Aerobotics, etc.

A Fruitful Way Towards Sustainable Agriculture

Due to the growing population and the depleting resources, there is a greater need to focus on the agriculture market. Agritech is playing a significant role in ensuring that enough resources are produced to feed the entire population of the world, without compromising on sustainability. The use of modern technologies in the field has significantly reduced the amount of resources required for production. For instance, weeding robots reduce the use of harmful pesticides by 90%, shelf life extension has the capability to add 10% increase in sales. There are several such advantages.

While farmers in some areas who have been engaged in traditional farming might be a bit reluctant to these technologies as they involve huge costs for them, support from government, development of appropriate infrastructure, reduction in costs will encourage them to adopt these measures. Investors have started to realise its significance. This is evident from growing investor traction in agritech. The market has attracted $6.4 Bn in funding in the year 2020. We can say that the agritech market is a low hanging fruit that would benefit both producers and investors in the long run.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Seizing Tax-Efficient Investments: Recommendations for Indian HNIs

by Sandeep Kumar

Keep up to date with the latest research

Who qualify as an HNIs in India?

High Net-worth Individuals or HNIs, include those individuals who have investable assets of more than 5 Cr INR. The flourishing business environment in India, surge in the number of digital entrepreneurs, and foreign investments has facilitated the growth of the number of HNIs in the country. Currently, there are around 3 lakh HNIs in India, and the number is expected to reach 9.5 lakhs by the year 2027. They contribute about 58% to India’s GDP. Almost 30% of the Indian HNI population belong to metro cities of Delhi and Mumbai.

Source: Statista 2021

With huge amounts of investible money, HNIs are exposed to high rates of taxation. With the changes in the tax brackets according to the Budget 2019, there has been a steep rise of 22% in the surcharge rates for taxable income of more than 5 Cr INR. As a result, the effective rate of taxation for HNIs is as high as 42.74%. This forces HNIs to look for alternate ways of investments. Through this article we will look at how they can invest their money through tax efficient strategies.

Mistakes that most HNIs make

Saving taxes by creating separate legal entities for HNIs — HUFs, Trusts and its advantages

One of the ways of saving taxes on investments is by creating a pool of assets or a family unit by forming an HUF. It usually consists of assets that are received as part of a gift, will, or an ancestral property. HUFs and its members can claim deductions as stated under Section 80C, while filing their tax returns. As a separate entity, HUF enjoys a threshold exemption of 2.5 lacs INR and is taxed at individual slab rates thereafter. It can also avail separate deductions under Section-80C upto 1.5 lacs INR, Mediclaim for family members under Section-80D up to INR 25,000 and in case any member is a senior citizen up to INR 50,000, under Section-80TTA up to INR 10,000 and for senior citizens up to INR 50,000. Moreover, capital gains exemptions can also be claimed by an HUF under Section 54 and section 54F, 54B, 54EC, of Income tax Act,1961.

While forming an HUF or a family trust has several investment and tax-saving advantages, it can be quite difficult to dissolve since it requires equal consent of all the members.

Another option for HNIs to reduce their tax burden is to form a Limited Liability Partnership (LLP). Partners can infuse capital in several ways and firms can even raise funds from banks, corporates and NBFCs as well. The effective rate of taxation on LLPs is about 35%, which is lower than the effective tax rate of about 43% applicable to HNIs.

Engage investments in tax-efficient products

Apart from creating an HUF trust, there are some other ways in which HNIs can save their money on taxes.

Acceptance among professionals for tax saving instruments

While some investment professionals may suggest the above measures to their HNI clients, others have a mixed opinion regarding the same.

Entrepreneurs and professionals welcome the LLP structure not only because they are tax efficient but also provide increased efficiency. While MLDs and direct purchase of bonds may be tax efficient, they may carry some degree of issuer risk. Thus, investors must be careful before investing in these options. High-yielding but low rated investments face immense liquidity risks. Some investment professionals advise to avoid concentration in investments in the AA-rated and below-AA-rated segment until the economy revives from the downturn. Therefore, higher returns should not be the only criteria for investments, equal importance should be given to the risk factor involved.

Importance of portfolio rebalancing and goal setting

Traditionally, HNIs focussed on investing in a mix of debt and equity. However, there has been a shift towards other investment classes over the years that match the cash flows with liquidity and inflation. With greater amounts of wealth available, HNIs have a wide range of opportunities available for investment. However, there are certain points that should be considered while investing their funds. While choosing the asset classes to invest in, one should focus on diversification along with portfolio rebalancing. It is advisable that investors should put little weightage on complicated asset classes, as they come with liquidity constraints. Moreover, it is important that HNIs set a goal for their funds, and stay focussed till the goal is achieved.

In order to save themselves from high rates of taxation, HNIs should plan and look at the big picture before undertaking an investment. With the right investment strategy and the help of financial advisors, HNIs can find the most efficient investment options that fulfill their needs and will also help them take the benefit of untapped opportunities.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

How Mobile Gaming Is Moving Towards Its Pinnacle In India?

by Sandeep Kumar

Keep up to date with the latest research

Evolution Of Mobile Gaming In India

As our phones have become smarter over the years, the mobile gaming scenario has evolved. From the snakes game on your Nokia phone to PUBG, the mobile gaming sector has progressed manifold. 

The mobile gaming market in India dates back to the late 1990s, just a few years after the introduction of mobile phones in India. While the Snakes game introduced mobile gaming in India, Console and PC gaming companies started to take interest in mobile gaming in the early 2000s and invested their money which led to the growth of the market. In 2008, the launch of Apple and Android App Stores completely changed the mobile gaming scenario as it opened the world of games to every smartphone user. Digital payments also opened opportunities for mobile gaming companies to generate revenue directly from the players by charging premiums, offering upgrades, or through in-app purchases. This incentivised the entry of many firms into the market. In 2016 alone, Indian developed games were on the top of the local download charts on GooglePlay. With the launch of the most hyped game – PUBG in 2018, led to the double-digit growth of the number of mobile players in India.

Even though the Indian Government put a ban across some of the gaming apps due to data privacy concerns, the market has continued to witness growth during the pandemic as people look for different entertainment options. The growth trajectory is expected to continue as long as e-gaming companies integrate advanced technologies into their platforms, and provide even better customer experience through user-friendly UIs.

 

Key Highlights of the Sector

  • Key Players: Dream11, Junglee Games, Paytm First Games, WinZO, MPL
  • Market Size: $1.2 Bn
  • CAGR: 6.1%
  • Average Revenue per User: $8.88
  • Total Funding: $544 Mn (August 2020-January 2021)
  • Total Mobile Gamers: 365 Million

 

Competitive Landscape

With about 400 Indian startups working in the e-gaming sector, the market faces high levels of competition with several homegrown companies operating in the field, such as  WinZO, MPL, Nazara Technologies, Gamezop,etc. There is a high degree of competition in each gaming genre. Among growing competition where companies are struggling to gain revenue, Dream 11 is ruling the Indian markets with more than 80 million users in FY 2020. The growth of the company can be attributed to the rise in fantasy gaming and its endorsement by MS Dhoni. New companies are trying to make their mark in virtual gaming by providing innovative platforms and enhanced customer experience, through the use of advanced technologies like AR and VR. 

 

A $1.2 Bn Market, Mobile Gaming is Flourishing 

The penetration of smartphones and internet in the Indian markets has led to the rapid growth of the e-gaming sector in India. On the basis of devices, mobile users constitute 85% of the industry. India is among the top ten mobile gaming markets in the world, having a market size of about $1.2 Bn as of 2020 and it is expected that the market will continue to witness growth with a CAGR of 6.1% during the period 2020-2025. 

There are over 365 million mobile gamers in the country. The Covid-19 pandemic has fueled the growth of the industry as people look for alternate options for their entertainment while staying away from their friends and families. Mobile games allow people to connect with each other virtually, thereby fulfilling the social void. Moreover, some games even allow players to earn real money. By continuously adapting to new technologies and providing more localised and user-friendly customer experiences, the industry is expected to continue on its growth trajectory in the near future.

 

Source: Inc42Plus Report

Revenue Model of the gaming industry

The 2019 revenue estimates of major gaming and eSports companies in India was around $68 Mn. Let us look at some direct and indirect ways in which gaming companies generate their revenues. 

  • Free to play games – Users can play these games for free, however it comes with some in-app purchases of some additional items or in-game currencies, that may provide some incentive to the player in one form or another.
  • Freemium – Similar to the Free-to-play model, Freemium games allows users to play the basic version of the game for free, and requires them to pay a premium or charge to access the upgrades. Although it is the most popular model, the Freemium model is not helping startups to generate more revenue.
  • Advertising – Most games do not charge the players, but instead use advertising as a source of generating revenues. Ads may be interstitial that are placed in between level-based progressions, incentivised ads or contextual ads.
  • Shareware – Shareware model enables users to first play the trial version of the game, before they pay to unlock the complete version of the game. The demo version provides the gameplay experience and encourages them to purchase the full game.  

In India, most of the revenue for mobile gaming companies is generated through advertisements. A small proportion comes from in-game purchases, however this is likely to increase as disposable incomes of people are on the rise and more people take gaming more seriously. Other ways in which gaming companies generate income are through co-branding and sale of game merchandise, like t-shirts, posters etc. Some companies may also engage in strategic partnerships. 

Funding and M&A Landscape – How is the Market Garnering Investor’s Interest ?

The Indian e-gaming market has started to attract investors from around the world. Looking at the history, the mobile gaming sector has raised over $306 Mn in total during 2014 and H1 of 2020. The maximum share goes to the fantasy segment, consisting of about 59% of the total share, which amounts to $180 Mn.

Source: Inc42 Plus Report

The Indian gaming market has attracted a total $544 Mn funds during the period August 2020 to January 2021. This funding amount is expected to double in the next couple of years. Moreover, in recent years, a major part of the fundings has gone to growth stage startups. For instance, Dream11 received $225 Mn in investments in September 2020, and MPL received fundings worth $90 Mn in November 2020. Although there has not been any significant M&A activity in the mobile gaming market in India, as the market is expanding domestic and international firms are on a cautious lookout for acquiring stakes and consolidations with Indian startups. 

 

Boosters for the Mobile Gaming Sector

Technological advancements, like the use of Artificial Intelligence, Augmented Reality and Virtual Reality are expected to drive the market. The use of supporting hardware devices like headsets and mobile consoles improve the gaming experience of the players. A steady growth of more than 40% in mobile gaming equipment has been witnessed by hardware companies. Going forward, improved customer experience and customer relationship management will play an integral part in the e-gaming sector, by providing quick solutions and smooth services to the users. The growing importance of cloud-based services will also enter in the gaming world, especially with the roll out of fiber-based broadband service Jio Fiber by Reliance Jio Infocomm. 

 

Industry Issues and Challenges

The increasing popularity of the mobile gaming industry and low entry barriers has increased the competition in the market. With several companies providing games in the similar genre, it is important for them to retain customers as the gamers have very low switching costs.

Compared to the market spread, the investments in the industry are comparatively low. As a result, most gaming companies are unable to explore the technological infrastructure for the development of the sector. Some games also require high performance hardware that may be costlier. Hence, are unable to reach higher participation rates.

Another aspect that raises concern for the e-gaming industry in India is the policy and regulatory framework of the country. The lack of well-defined laws on online games, gamble, and fantasy sports proves to be a risk for some segments of the market. Last year, several gaming apps were banned over data privacy concerns. 

 

Outlook and Recommendations

India has surely evolved into one of the biggest markets for mobile gaming in the world, with some big firms operating in the sector such as Nazaran Technologies, Dream11, MPL,etc. Despite this the average revenue is just $8.88 per user, which is far behind the top five nations. While it is expected that with increase in disposable income, this is expected to increase in the future, companies should equally focus on other ways of generating revenue, that is through co-branding, collaborations with tech-firms. Moreover, companies should focus on attracting an audience through social media networks and gain support of online game streamers. With a major proportion of the Indian population below the age of 25 years, this seems the right time to establish e-gaming industry in India, which would generate revenue for players as well as the developers.

– – – – –

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Mutual Fund Investments in Private Market – Are they trying to replicate the VC investments?

by Sandeep Kumar

Keep up to date with the latest research

The emerging scope for institutional investors in the secondary markets 

The growth and performance trajectory of start-ups have increased significantly in the recent years as compared to what it was a decade ago. As a result, the secondary market for private equity has witnessed a steep upward trend as the value of private equity is booming. It is expected that the secondary market volume will reach $100 Bn this year. While there are several parties involved in private equity investments, our focus for this article will be around VCs and Mutual Funds. We will also try to analyse the extent of involvement of Mutual Funds. 

Liquidity and return on capital serve as major factors that affect investment decisions of institutional investors. To ensure greater liquidity, it is important that institutional investors have easy access to the private markets, either directly or through their advisors. Mutual Funds help provide these benefits to investors. As a result, it has started to gain traction as a new asset class in the market with aggregate valuation of mutual funds’ investments in private firms increasing from $16 Mn in 1995 to over $8 Bn in 2015.

VC Funds versus Mutual Funds – Which brings more liquidity?

With growing participation of Mutual funds in private equity, it may seem that they are following the track of VC firms. But let us understand how the two differ in terms of their rights in the private markets.

While VC firms support startups from their early stage to their growing stage, Mutual Funds specifically focus on later stage investments in startups. The latter are distinctively concerned about the liquidity benefits. As a result, Mutual Funds are more concerned about redemption rights compared to VCs. These redemption rights not only help with liquidity management, but also protect the investors from consequences of down-IPO

The IPO-related rights are given much more importance in Mutual Funds. They are more likely to have at least one of the two IPO-related rights, which includes a promise to investors about certain return in an IPO, and veto rights on down-IPOs. But in order to win some, one has to lose some. Therefore, Mutual Funds enjoy lesser direct control rights compared to VCs.

What kind of unicorns do mutual funds invest in?

Mutual funds are more likely to invest in the later stages of startup funding, as during a firm’s later stage funding rounds it is easier to assess their performance and it also guarantees higher growth than young startups. These generally include large firms that are closer to a potential IPO. Firms that have greater workforce and are looking forward to doubling its size, have a higher probability by 4-5% of mutual fund participation in rounds.

VCs play an important role in the investment participation of Mutual Funds as they are more likely to invest in funds that are backed by experienced VCs. The experience and intellect of the VCs ensure more credibility, better monitoring and greater social capital. Moreover, with greater resources, larger funds are more likely to invest in unicorns. Particularly, larger funds with less volatile fund flows are more likely to invest in private firms, consistent with liquidity concerns.  

Source: Chernenko et al (2020)

Benefits of Mutual Funds that serve as gateway for average investors 

Pre-IPO investments are difficult to access for average investors. Mutual fund investors provide a chance to these investors to put their funds in unicorns indirectly. They make PE investments easy to access, without compromising  on the liquidity. Fidelity’s Contrafund, is one of the biggest and widely-held mutual funds. Another example is The New Horizons Fund.

With a booming market of private equities, more and more investors are moving to the space as they too want to be benefitted from the hyper-growth phase of unicorns before they go public. Mutual funds are responding to the needs of the investors to grab on the early access by allocating a portion to private space. They provide transparency to investors as they publicly disclose their portfolio holdings. These benefits of easy accessibility to private markets and greater transparency are the reasons why mutual funds are gaining traction among investors.

 

Returns and Benefits attracted by Mutual Funds through Pre-IPO Investments

As mentioned earlier, Mutual Funds focus more on contractual provisions, particularly the redemption rights that would allow them to escape the sticky situation if the IPO is delayed, or IPO ratchet that protects them from down-side IPOs by issuing additional shares that places the investor in the same or nearly same position had the IPO been priced at the previous valuation.

It is important to note that Mutual Fund investments essentially take place in the later rounds of funding, before the company goes public. This ensures greater returns than the public market returns. It is estimated that mutual funds’ returns swell up by 67% to 161% higher in the private equity market, compared to those on broad public market indices. Another positive aspect of such pre-IPO investments is that the fund is able to obtain optimum allocation in a company’s IPO as they are underpriced by an average of 15%. Thus funds are able to enjoy greater equity ownership than they would, had they invested in the company post-IPO.

 

Are founders comfortable selling their stakes to Mutual Funds and why?

It seems that the private firm owners don’t mind mutual funds investing into their businesses. This is evident from the figure below that shows a steep rise in the aggregate holding of mutual funds in unicorns since 2014. The main reasons why these companies go public is that it provides provision of capital, greater liquidity, and a more dispersed shareholder base. Mutual funds provide all these benefits to these firms, while staying private. 

Source: Chernenko et al (2020)

Even though participation of Mutual Funds in the private markets is often compared to that of VCs, we can see that they both differ in their objectives and the investment preferences. Data suggests that about 149 funds across 14 largest fund families have invested in 270 unique, VC-backed private companies over the years 1995 to 2016. Looking at the trends, the growing need for higher returns in new asset classes will push more investors to adopt this route towards private equity investment.

 

– – – – –

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Internet Of Things: Building a Connected World Through Powerful Technologies

by Sandeep Kumar

Keep up to date with the latest research

Internet of Things (IoT) is one of the most prominent technology trends, IoT is disrupting both the consumer (retail, healthcare, and services) and industrial sectors, such as transportation, water, oil and gas, agriculture, and manufacturing. In the manufacturing sector, the business of extracting and transporting oil and gas is filled with challenges. There are several drivers of growth for this sector. A report by McKinsey mentioned that the number of businesses that use the IoT technologies has increased from 13% in 2014 to about 25% today. And the worldwide number of IoT-connected devices is projected to increase to 43 billion by 2023, an almost threefold increase from 2018. The IoT cloud platform market is expected to grow from US$ 6.4 Bn in 2020 to USD$ 11.5 Bn by 2025. The IoT solution segment has dominated the overall IoT monetization market.

The trend in the market is expected to continue both as a result and an impetus of constant technological advancements. The pandemic, along with our lives, has also affected the way this trend is developing. In a world where work from home is a norm, more intelligent automated scheduling and calendar tools, as well as better quality, more interactive video conferencing, and virtual meeting technology will be required while working remotely. Healthcare witnessed a drastic change in the way it is delivered from telemedicine to smart wearables to sensors.

Source: Pitchbook, Gartner

IoT is not just a technology initiative anymore, after the worldwide lockdown imposed by the pandemic businesses will look for ways to improve efficiencies. The emphasis on the business outcome from implementing has increased significantly IoT initiatives are no longer driven by the sole purpose of internal operational improvement.

Industry Performance in the Recent Years

The global market for Internet of things (IoT) end-user solutions is expected to grow to $212 Bn in size by the end of 2019. The technology reached 100 Bn in market revenue for the first time in 2017, and forecasts suggest that this figure will grow to around 1.6 Tn by 2025.

Source: Pitchbook, Gartner

Key Highlights

• In 2021, there are more than 10 billion active IoT devices. In 2019, around 127 new devices per second connect to the web.

• It’s estimated that the number of active IoT devices will surpass 25.4 billion in 2030.

• 83% of organizations have improved their efficiency by introducing IoT technology.

• The amount of data generated by IoT devices is expected to reach 73.1 ZB (zettabytes) by 2025.

• In 2018, 57% of businesses adopted IoT in some way. By the end of 2021, the figure should hit 94%.

VC Investment Sentiments

VCs poured close to $11.1 Bn in IoT companies in 2020, though the deal count was less the total was on 2018 level. Majority of the drop came from early stage VC deals, which fell to its lowest since 2016. At the product category level, the IoT-compatible chipsets, manufacturing & supply chain, connected vehicles, smart home, and IoT security segments each raised over $1 Bn in VC, driving the year’s total deal value.

Instead of a sole value driver IoT is more suited for driving diversified software and hardware companies. Business dealing in connectivity devices, energy and utilities and connected commercial real estate witnessed sharp increase in funding. Each segment drew over 2x gains in deal value YoY, although each was dramatically affected by the pandemic.

The IoT industry set VC exit records in 2020, achieving $14.0 billion in total value across 61 exits. Exit values have never crossed $4 Bn in previous years. The star of the show was C3.ai, which had a record $3.4 Bn IPO in the US market. 2020 was also a strong year for M&A activities with 48 deals valuing up to $2.8 Bn. IoT hardware, IoT software, and connected buildings generated most of the activity.

Segment-wise Analysis of Performance and Opportunities

 IoT Hardware and Devices

The IoT hardware includes sensing devices that have the capabilities to collect and route data to enable control and communication through the internet. Continuous innovations in chipsets, sensor systems, and connectivity devices for IoT networks, may result in an innovator’s dilemma for the incumbents. However, startups have an advantage as they can experiment and develop freely. The reducing cost of production for IoT hardware and greater connectivity are driving the market. Moreover, as the devices are becoming cost efficient, it has encouraged their adoption and innovation.

It is estimated that the IoT hardware market constitutes nearly 48% of the total IoT industry and would reach $271 Bn by the end of 2021, growing at a CAGR of 12% during 2021–2026. The segment had a positive response from VC investment last year, raising over $2.5 Bn. During the pandemic, China was in particular the driver of deal flow in the segment. The custom chips for IoT applications witness higher inflow of funds from China compared to the USA.

One can capture great market opportunities within the segment by focussing on future possibilities for growth in Tiny ML microcontrollers and battery sensors. It is projected that the Tiny ML device market would grow at a CAGR of 41% from 2021–2024. Some startups that are already focussing on this opportunity are Arm, Greenwaves, Syntiant, etc.

 IoT Networking Infrastructure

The IoT network connects the device data to cloud networks. The segment is expected to witness growth as the governments across the world provide incentives for building smart cities, and enterprises prefer novel networking for asset tracking and predictive maintenance.

So far, the segment is expected to grow with a CAGR of 17% from 2020–2022. The investment deal activity has relatively plateaued in 2020, but still managed to raise over $500 Mn last year. Majority of the VC investments have inclined towards 5G technology. Some firms that appear to benefit from growth in 5G are EdgeQ, Blue Danube, Siklu, among others. However, the pandemic has delayed the execution and deployment of 5G technology.

 IoT Software Solutions

IoT softwares enable various functions throughout the IoT value chain. These include connectivity routing, application enablement, device management, data management and analytics, etc. Analytics is required in almost every field today. Therefore, IoT devices with abilities such as sensory data, AI and ML algorithms will witness a huge market opportunity.

The market for IoT software is expected to grow at a CAGR of 11.4% from 2021–2024. However, the share of the segment in total market for IoT is expected to decline over time as more processing shifts onto the devices themselves. AI and ML play an important role in driving the segment due to its widespread adoption. It is suggested that startups will be able to provide improvements in the area by upto 10x, making it a competitive marketplace. Some companies that are already working in this direction include C3.ai, SparCognition, FogHorn, Noodle.ai, among others.

 IoT and Industry 4.0

Industry 4.0 includes IoT technologies that facilitate the growth of smart capital intensive industries, including manufacturing, agriculture, energy and utilities. Such technologies are largely implemented to empower autonomous equipment operations.

The segment is projected to grow at a CAGR of about 23% during the period 2021–2028. The VC investment in the segment remained strong even during the pandemic due to faster adoption of digital operation in capital-intensive industries. There are several opportunities within this segment that are expected to witness fast growth in the coming years. These include asset-tracking, drones, predictive maintenance using ML, among others. Samsara, CloudLeaf, Embention, Clobotics are some companies that will benefit through their operations in these areas.

 Smart Services and Infrastructure

IoT can be a great help in offering smart assistance through smart healthcare, connected mobility, smart cities and other consumer services. These innovations will also favour the goals of sustainability and positive environment impact.

The market is expected to reach $200 Bn by 2021 and is projected to grow at the annual rate of 13%. Investments in connected services, particularly healthcare and vehicles have grown even during the pandemic. The demand for vehicle connectivity is expected to grow in the future as it is suggested that 60% of vehicles will have vehicle-to-vehicle connectivity (V2V) by 2023. Some companies that are expected to progress in the smart mobility and smart healthcare services segment are Kymeta, Smartdrive, Whoop, etc.

Industry Outlook and Key Limitations

 

Large internet of things (IoT) and operational technology (OT) security companies can be built across segments of the edge device value chain as well as for individual device types. However, IoT-focused platforms are limited in addressing the leading use cases for IoT security spending including manufacturing, natural resources, and transportation given devices’ limited connectivity to the cloud.

To overcome the industry’s concerns, security incumbents will be expected to address IoT security across the value chain and across product kinds. To date, security software providers have sought to address the IoT security opportunity with point solutions that aren’t tailored to specific industry threats. As a result, IoT security adoption is still low and uneven across organisations. More comprehensive vulnerability assessment and communications security capabilities will be included in future XDR platforms. As a result, we expect infosec incumbents to continue to improve their IoT security capabilities throughout the value chain.

– – – – – 

This article has been co-authored by Ayush Dugar and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Right Menu Icon
Cancle

Login to your Account

Sed ut perspiciatis unde omnis iste natus error sit voluptatem

Forgot Password?
cross

Select Country