Understanding how the pandemic has fueled the growth of the Secondaries Market

by Sandeep Kumar

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Secondaries Market and its Performance during Pandemic

The buy-and-sell of pre-existing investor commitments to private equity and other alternative investment funds is referred to as the private-equity secondary market. Transferring interests in private equity and hedge funds can be more complicated and time-consuming due to the lack of established trading venues for these interests. Private equity has traditionally been an illiquid sector, with institutional investors acquiring buyout funds and waiting more than ten years to enjoy the rewards. Private Equity was designed for investors who preferred to buy and hold assets rather than sell them for a quick profit.

Market downturns have historically had a short-term impact on secondary markets. The Covid-19 pandemic has brought about an evolution in the financial world and a similar change has been witnessed in the private equity secondary market. Through this article we will understand how the secondaries performance has fuelled post the onset of pandemic.

Historical Returns in the Midst of Pandemic

Market downturns have historically had a short-term impact on secondary markets, reducing transaction volumes, delaying realisations and distributions, and placing downward pressure on price. Secondary markets have usually returned from market downturns with significant activity, and have presented excellent possibilities for investors with available investment money once volatility has subsided and stability has been restored.

During the pandemic, due to great degree of uncertainties and subsequent volatility, investors in the secondary market grabbed the opportunity by buying the dip and securing their positions by purchasing at greater discounts. According to Greenhill’s Report, greater interest has been seen particularly in COVID-proof” sectors, newer vintage funds and more concentrated exposures, which are easier to diligence and underwrite. The secondary market experienced large volume growth in the second half of 2020 and into 2021. In 2021, we can expect secondary transaction volume to hit new highs. Secondaries may find more enticing pricing as a result of the market’s uncertainty, resulting in increased prospects and profitability.

Why the secondaries market are attractive?

· Recent Vintages (post-2015): Recent vintages with unfunded capital have become more attractive to investors in the present circumstances. Investors get insight into the portfolio and platform investments, as well as assurance that the increased cash available may be used offensively as well as defensively. High-quality GPs with ample money who are seen as capable of handling market disruption are especially appealing.

· GP-led Transactions: The number of tail-end funds and older assets appears to have risen with the possibility that the COVID-19 epidemic would further delay exits. High-quality general partners have continued to use the secondary market to maintain high-performing firms while also providing current limited partners with a liquidity alternative. With a number of secondary deals started this summer, the GP-driven market has led the resurgence in secondary transactions.

· Single Asset Transfers: As the frequency of single asset transactions in high-quality firms increases, general partners keep seeking for methods to keep their best companies. Diversifying among funds is one method secondary investors may reduce concentration risk. Single asset transactions are especially desirable in the COVID-19 environment since it is easier to assess the impact of COVID-19 on a single firm than a large mix of portfolio.

· Dry Powder Advantage: These days, investors are demand more liquidity and the ability to rebalance their portfolios across asset classes. Due to this demand, a secondary market has emerged where investors may sell or buy private equity commitments rather than just waiting for a return. The seller of a PE share can access liquidity in the secondary market, just as in the normal stock market, while the buyer receives access to private equity funds and diversification.

It has been estimated that in the year 2020, players in the secondary market have enjoyed high levels of dry powder that is ready for deployment. They are in a position to enjoy profitability by buying in at above average discounts to lock in greater appreciation. With the current trends, it is estimated that the transaction value for secondaries will exceed $100 Bn by the end of 2021. The growth trend is not expected to end anytime soon as markets are now more liquid than ever due to technological innovations in the field and the growing acceptance of digital assets and tokenization.

Source: Acuity Knowledge Partners

Secondary Buyouts

Since 2006 to 2019, SBOs have witnessed a growth of 5.2% per year. This option has been experiencing rising popularity due to better liquidity options and lower risk staregies. Study conducted by Deloitte estimated that more than half of the investors surveyed expect SBO funds will offer one of the best opportunities for returns over 2020–2021.

Source: Deloitte Insights

The Way Forward

As a result of the current market dislocation, protracted volatility, and ongoing pandemic, the secondary market has seen lower pricing and more opportunities in younger assets. Financial decisions made by investors in the secondary market may be influenced by structural changes caused by economic crises, and failing to account for these fundamental breakdowns in the market may result in investors making incorrect interpretations and portfolio selections. However, secondaries are still, absolutely a great place to put your money. In the second half of 2020 and into 2021, the secondary market saw significant volume growth. Secondary transaction activity is expected to reach new highs in 2021.

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

The state of European Fintech and with the explosive growth and maturity, who are here to stay?

by Sandeep Kumar

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Overview of European Fintech Market

From payment processing to insurance and wealth management, the digitisation of the financial services has led to a massive growth of the fintech market all across the world. In this article we will be focusing on the European region in particular, where the fintech market is growing so rapidly that the fintech adoption in the region has surpassed that of the USA. At the start of the year 2021, Klarna was the only fintech decacorn in the region and now Revolut and Checkout have also joined the club. The year saw a record growth in the number of fintech unicorn additions as 19 startups were promoted to unicorn status.

Source: Crunchbase

Surge of Fintech Funding in Europe

Overall funding to European fintech scale-ups reached €4.55 Bn in 2017, but fell to €3.52 Bn in 2018. However, in 2019, European fintech businesses, particularly those in the growth and late-stage stages, witnessed a massive increase in fundraising rounds, culminating in a total of €8.81 Bn in fintech funding, a 150% increase over the previous year and nearly double the number in 2017. Around €4 Bn was raised by European fintech businesses in the first half of 2020, already more than in the full year of 2018, but lagging behind the trend of 2019, when more than €8.8 Bn was raised.

Fintech Investments size in European Funding Round till H1 2020

Regulatory Environment

The rise of non-financial companies into the tightly regulated financial sector has resulted in a rising need for regulators, the fintech community, and the financial services industry to properly engage with developments in this space. The vast bulk of financial services legislation and regulatory norms predate rapid technological advancements and consumer demand for change. While governments in a lot of nations want to be viewed as promoting innovation, the law has been slower to catch up.

Regulatory authorities across Europe, including the European Central Bank, the FCA in the United Kingdom, the AMF and ACPR in France, the AFM and DNB in the Netherlands, the European Commission and Parliament, the BaFin in Germany, the CSSF in Luxembourg, and the European Securities and Markets Authority (ESMA), have publicly stated their support and launched new regulatory initiatives to encourage innovation, along with the European Commission and Parliament, the European Central Bank, and the European Securities and Markets Authority (ESMA). The EU Commission has started a study on technology and its influence on the European financial services industry as part of its customer finance action plan, which is expected to have a substantial impact.

Growth in Europe’s FinTech Deals

With about a third of the region’s unicorns belonging to the fintech sector, companies have attracted the interest of the investors. With a collective valuation of $178 Bn, the market has raised more than $11 Bn in the present year. In the first half itself, the market had raised funding that was 1.5x of the previous year. While the number of deals in Q2- 2021 fell sequentially by 8%, the investments have grown by 30%. This has resulted in hitting a quarterly record of $7 Bn which was facilitated by megarounds of Klarna, Trade Republic, SaltPay, etc. The recent focus of investors as observed has been on wealth management and insurance tech.

Source: Crunchbase

Record Year for Fintech Exits

The growth of European fintech has also facilitated the rise of fintech exits in the region. The first half of 2021 witnessed about $26.5 Bn (or €22.6 Bn) worth of exits. This has been a record high in the exit scenario, and gives high hopes to investors, particularly after less than $2 Bn worth of exit activity in 2020.

The most successful one this year has been the public listing of Wise — a London-based money transfer company. The company went for direct listing in the London Stock Exchange which increased the company’s valuation to over $13 Bn as of August 2021. Apart from this, Tink and Currencycloud were strategically acquired by Visa for $2.1 Bn (€1.8 Bn) and $960 Mn (£700 Mn) respectively.

In total, fintech exits banked VCs $70 Bn during the period from January till July. Of the total figure, about 20% of the exit figures have come from Europe.

How are Different Segments Faring?

The use of technology in financial services is vast and gives rise to various segments including payment processing, neobanks, insuretech, crypto-exchange, wealth management tech, etc. Let us have a look at how some of these sectors have been performing:

 Payment Platform — With the digital payments sector expanding across the globe, this segment has benefited from a high proportion of funding received over the years. This is evident from the success stories of Klarna and Checkout. The pandemic has further accelerated the potential of the sector. Looking at the top 10 VC backed fintech exits in the region, more than half of the companies belong to the payments and money transfer segment, these include WorldPay, Wise, Adyen, etc.

 Insurtech — This segment has been witnessing greater attention from investors since 2020. In the first quarter of 2020, insurtech comprised about 20% of the total fintech rounds in Europe. The sector’s combined valuation for the year amounts to over $23 Bn. Insurtech funding in Q2 of 2021, has increased by about 403% on just Quarter on Quarter basis.

 WealthTech — Wealth management technology companies, or simply the WealthTech sector has also led growth along with the insurtech sector, witnessing an increase in the investor preference. While the number of deals for the segment increased by only 9%, the funding in Q2 of 2021 grew by 272% on Quarter on Quarter basis.

 Cryptocurrency and DeFi — Cryptocurrency and Decentralised Finance (DeFi) are gaining momentum in the finance world. With great buzz around crypto, the funding in such companies has jumped 300% from what it was in 2019, amounting to $1.4 Bn this year. Some examples of companies in this segment include — Elliptic, Blockchain.com, Copper, etc.

 Other Segments — Looking at the Quarter on Quarter funding rounds, funds in fintechs involved in the banking segment as well as capital markets rose by 70% individually and digital lending by 64%. On the other hand, QoQ investments in real-estate fintechs fell by 87%.

How has the Pandemic Impacted the Market and What is the Way Forward

With the onset of the Covid-19 pandemic, there has been greater reliance on digitization of various operations across different industries. This has facilitated the growth of the fintech sector post-pandemic as businesses are working to adapt to the new normal. The regulatory environment has also supported the growth process in the European region, so much that it is now performing better than North America. Particularly, the payments segment has always been investors’ favourite, however, the post-pandemic focus of investors has shifted towards insurtech and wealth management tech firms.

We believe the current boom of the fintech market in the continent is to be continued in the coming years. This is evident from the significant growth in the VC funding in recent years, with the overall funding round size average increasing by over 100% compared to three years ago. Investors are expected to gain huge returns from the growing valuations of some unicorns and their great successful exits.

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

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

by Sandeep Kumar

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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.

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

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Wall Street’s dream week, crazy week for the IPO market

by tradmin

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“U.S. IPOs are having a busy week as 21 companies are expected to price their offerings raising more than $10 billion combined in the coming weeks.”

23 new IPOs were listed at NYSE and Nasdaq combined, making it one of busiest week in Wall street in last few years. Wall street is for visionaries, people who can look forward and measure up the market moves. It’s not for people Reminiscing the past and wallowing in its sorrow. Corona pandemic was past and the recovering economy, potential successful vaccine and rising sentiments among investors are already showing signs. Wall street has always been front runner and rightly so. The last week has seen crazy amount of IPO activity in the market and many more billion-dollar companies are soon to follow.

Snowflake’s share soared on the first day of trading with its valuation doubled from $33 Bn to over $70bn, making its initial public offering the largest ever for a software firm. Snowflake is a cloud computing company, that went public on NYSE on 16th Sep 2020 and raised $3.36 Bn. The overenthusiasm among the investors pushed the first day trading price to $245 — more than double its IPO price — in New York trading. Multiple VC and early stage investors have been able to mint billions of dollars from the IPO. The share got additional traction after the investment interest from Ventures and Berkshire Hathaway.

JFrog a DevOps software development company also went public on 16th Sep 2020 with IPO priced at $44 raising $509 Mn at the company valuation of just about $4 Bn. By end of the day JFrog’s stock soared 47.3%, closing at 64.79. JFrog was reportedly valued at $1.5 billion last year and IPO provided a huge valuation boost to the company. The soaring valuation of the company shows how much the investors are willing to pay for high growing SaaS company.

Unity Software went public with a blockbuster IPO this Friday, with its price jumping 44% by the end of the day. The company raised proceeds of around $1.3 Bn by selling 25 million shares at $52. Its stock raised as high as $76 in early day trading lifting company’s valuation to around $20 Bn. Unity is world famous gaming development studio that is known for hits such as “PokemonGo”, “Call of Duty:mobile” etc. Unity expected its IPO price to be round $34 – $42, but the enthusiasm about the stock among the public helped company go with IPO at $52. Sequoia Capital and Silver Lake were the biggest investors in Unity before the IPO, with Sequoia owning more than 24 per cent. Unity reported loss of $54 Mn this year, even though its revenue is on the rise, reporting $351 Mn earnings last year, 39% up from previous year. Gaming is the fastest growing segment in media category with 2.5 billion gamers worldwide and $140 Bn in revenue which is also consistently rising exponentially.

Sumo Logic: Sumo logic was the third venture backed software company listed this week, on 17th Sep 2020, on the exchange with the price above its anticipated range. The company raised $326 Mn with shares priced at $22, with the day closing at 26.8 a 22% jump in the closing price. Sumo logic is pioneer in continuous Intelligence with applications across digital transformation, cloud computing and analytics. Sumo like many others going public this week has shown solid revenue growth but also equitably growing losses. But the multiple times oversubscription of the company shares and the rising stock price shows the confidence investors have on the company and its growth potential.

Investors are bullish on the market and wall street is riding on the positive wave. Past few weeks have seen strong IPO activity after a long dull period, with 23 new IPO listed on NYSE and Nasdaq just this week. List of IPO listed during this week:

Billions of dollars have changed hands with number of VCs and early stage investors making big exits. Just a month ago when the companies were worried sick about corona and its potential impact on the investments and their portfolio, last few weeks have seen a complete shift in scenario. Sequoia a leading VC was largest owner of Unity, had 8.4% stake in Snowflake and some ownership in Sumo Logic had around $9 Bn worth in these three companies, earning health profits with exits. Many other investors have seen a profitable run and the IPO fever is not expected to end any time soon.

Whatever be the reason, be it the recovering economy from the pandemic, be it the strengthening investor sentiment or be it the escape from the future political uncertainty from elections IPO market is up and running. U.S. IPOs are having a busy week as 21 companies are expected to price their offerings raising more than $10 billion combined in the coming weeks. 

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

by Sandeep Kumar

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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.

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

How increased acceptability towards EdTech platforms is changing the long-standing traditional education industry?

by Sandeep Kumar

Keep up to date with the latest research

Edtech market landscape and growth in the short run of pandemic

Edtech abbreviation for Education Technology is the combination of IT tools and educational practices aimed at facilitating and enhancing learning. Edtech encompasses not only the hardware and software program but also the learning theories and the most effective ways to teach people. Edtech solutions are being increasingly adopted as it offers numerous advantages. A majority of educators believe that each student learns at their own pace, a few major benefits that Edtech offers students are the accessibility of resources to learn from and flexibility to train at their individual pace. Another advantage is the comparatively lower cost which makes it more affordable for anyone to expand their knowledge.

Globally the market opportunities amount to $227 Bn and likely to reach $404 Bn by 2025 growing at a CAGR of 16.3%. The global Edtech venture capital funding in 2019 was around $7 Bn, in 2020 this amount increased more than doubled and reached $16.1 Bn! The booming sectors of Edtech are

· K-12 education

· Post-secondary education

· Corporate training

K-12 is the largest segment of the market; however, the highest funding received was by skill development startups. This signifies that the rise of Edtech startups has created awareness for skill development and not just graduation for a successful career.

Snapshots

· Key Players: Byju’s, Yuanfudao, Zuoyebang, VIPKId, Articulate, Udemy. etc.

· Market Size: $227 Bn

· CAGR: 16.3%

· Average Valuation of top 10: $6.49 Bn

Edtech market size ($ Bn)

Source: Holon IQ

The rapid change in industry dynamics post-covid

The pandemic resulted in shutdowns of physical classrooms, globally, over 1.2 billion children are out of the classroom. To tackle this education changed drastically with the rise of e-learning and remote teaching. Prior to the pandemic, the EdTech sector was growing but at a relatively slower rate as online education was still met with some resistance. The lockdown and fear of COVID-19 spread have taken schools, colleges, and educational institutes online, thus leading to the emergence of many EdTech products and services and a rise in adoption. Though in its nascent stage, there has been a significant transformation in curriculum development and pedagogy where we have moved from thinking digital to being digital.

Drivers of growth

The increasing penetration of mobile devices, easy accessibility to fast internet, and the impact of the pandemic and growing online teaching-learning models to keep running the education system are majorly driving the growth. The presence of interactive and immersive learning can impact several as it increases the level of interaction. Educators are also increasingly adopting newer technologies like AI, virtual reality, and gamification.

Edtech development over the past made the educators doubtful about the impact of technology on improving the outcomes of students. It also created suspicion about overreliance on smart devices. However, the situation is now changing with schools investing more in the attempt to integrate new technology into traditionally delicate educational structures. Employers are also investing in such skills with a focus on leadership and management and creative problem-solving.

China and India are the biggest markets for education in the world. The Asian region has always shown lower-income elasticity for education relative to other sectors. Moreover rising access to digital tools and increasing government initiatives in India and China has further emphasized the importance of education.

VC Deal Size

Source: Pitchbook

Segment-wise market mapping and major players

The ed-tech industry, generally segmented into the Pre-School, K-12, and Higher Education sectors have continued to evolve over the years.

With digital learning, the preschool segment is expected to witness the fastest CAGR from 2021–2028. The global early education market is expected to reach $480 Bn by 2026. Implementation of technology in this segment will enable educators to use applications to maintain records of the students in a much more efficient way, as well as help curate interactive games, storybooks, and other content for early childhood learning. Companies like Makeblock, Tinker Garten, Flintobox, etc., provide interactive activity-based learning for young minds.

The major share is captured by the K-12 sector, with a share of about 41% as of 2020. There are great developments in the education system across the globe that supports experiential learning which is enabled with the help of gamification and AI-based technology. While the use of technology such as interactive whiteboards, learning management systems had already started to gain acceptance before the Covid-19 pandemic era, more focus is shifted towards software that provide O2O tutoring, virtual field trips, interactive lab experiments, etc. Key players in the K-12 segment are BYJU’S, K12 Inc., Kahoot, Khan Academy, Chegg, Quizlet among others.

The global higher education market is expected to grow at a CAGR of 10.2% from 2019–2027. With university and college fees soaring, people are relying more on edtech platforms for e-learning, college or career preparations, and even financial assistance. Professionals in the modern world are constantly required to constantly upskill themselves to match with the evolving job opportunities. Thanks to MOOC platforms, one can now have access to the world’s top university courses, sitting at home. Major edtechs like Coursera, upGrad Education, Udemy, Skillsoft, DataCamp, etc. make learning an easy and affordable process for young aspirants and professionals.

Innovations and new technologies leading to a colossal $404 billion market in the future

Implementation of the latest technology contributes significantly to the growth of the edtech industry.

Valuation multiples for the global edtech space

Global peer comparision and their EV/Revenue Multiple

Edtech sector provides a lucrative investment opportunity with high growth prospects, but as evident by the peer comparison as the company grows the market saturates as most of the available opportunities have already been captured. We are cautiously optimistic about entering into the market as later into the life cycle of the business chances of above-par returns will be sleek.

The edtech conundrum: necessity or costly?

Online courses and programs offer cheaper options for learning than traditional education options. According to reports, a degree course in a traditional university or college costs a total average of $85,000. On the flip side, an online degree costs $30,000. This means enrolling for a course online offers students the opportunity to save more tuition fees and boot camps while enjoying greater flexibility. However, that doesn’t mean that the traditional method is not all bad; they offer tangible learning and study experience and access to university resources.

In our opinion both methods have several offerings and calling on better than the other won’t be right as both have their pros and cons. This brings us to the inevitable, that integration of both the methods is the way going forward.

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

Alternative Investment Funds – Supplementary Investments for Better Returns

by Sandeep Kumar

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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.  

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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

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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.

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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

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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.

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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.

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

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