Finance

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.

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This article has been co-authored by , 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.

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.

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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.

Internet Of Things: Building a Connected World Through Powerful Technologies

by Sandeep Kumar

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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.

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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.

Green Bonds: An efficient instrument for financing environmental goals

by Sandeep Kumar

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Investing in projects with environmental benefits

Climate change is a major problem in today’s world and it affects almost every sector in the economy, directly or indirectly. One way through which we can combat this problem financially is through Green Bonds. Green Bonds, like any other bond, is a fixed-income instrument that focuses on mobilizing resources from domestic and international capital markets and channelizes it for environment-friendly projects, such as sustainable waste management, renewable energy, pollution prevention, etc. The risk and returns involved are similar to the traditional bonds.

The World Bank is the largest issuer of Green Bonds. According to the World Bank’s 2020 Impact Report, 111 projects are eligible for green bond financing. Since 2008, it has issued $14.4 Bn in bonds with 164 green bonds across 22 currencies. About $1 Bn equivalent in bonds were issued in FY 2020.

Source:World Bank Impact Report 2020

Emerging trends and evolution of green bonds

Since its inception in 2007, the green bond market has reached cumulative issuance worth $1 Tn. The volume of labelled green bonds has been increasing steadily since 2013. It had issuance worth $280 Bn in the year 2020. With greater emphasis on environmental, social, and governance (ESG) objectives, the green bond market is still evolving and has started to gain its popularity.

Source: Climate Bonds Data Intelligence Reports

Green Bonds can be broadly classified into the following categories:

● Use of Proceeds Bonds– These are standard recourse­-to-the-­issuer debt that has the same credit rating on the stock market as the issuer’s other bonds. An example of this is the European Investment Bank’s Climate Awareness Bond. It has raised €7.6 billion during the period 2007–2014.

● Revenue Bonds- These are debt instruments with non-recourse-to-the-issuer. Its proceeds generated by fees, taxes,etc. are reserved for green or environmentally friendly projects. For example, AAA rated revenue bonds worth $321.5 Bn issued by Iowa Finance Authority which were backed by water­ related fees and taxes collected by the State.

● Green Project Bond- These project bonds are involved in the development of one or more environment-related projects for which the investor has direct exposure to the risk. For instance, a US development finance institution, OPIC, had issued $47 Mn worth of green guarantees for US investors. The amount will be used to invest in a photovoltaic project in Chile, called the Luz del Norte project.

● Green Securitized Bonds- These bonds are collateralized by one or more specific projects, where the first source of repayment is generated through the assets.It is similar to how the US based solar installer SolarCity Corp entered the green bonds market by backing it with solar lease agreements.

Cost efficiency and growth in revenue achieved with the issuance of green bonds

Various costs are involved in the issuance of bonds, which may depend on the value of the bond, complexity of the deal, taxes, issuer’s risk profile and other things. In case of green bonds, the fee is generally calculated as a fraction of the market face value of the emission. Thus, the cost of issuance of green bonds may vary from a few thousands to millions of USD.

Moreover, compared to conventional bank loans, green bonds have a positive impact on the profitability of environment-friendly projects. This is indicated by higher IRR for shareholders. Higher IRR is attributable to lower financing costs of green bonds relative to bank loans.

Green bonds have proven to be more efficient towards sustainability goals, compared to other means of financing. According to Asian Development Outlook, on an average, Asian firms that issue green bonds improve their environmental performance by 30% after 2 years. Additionally, companies that issue green bond issuers have proved to show greater resilience during the pandemic.

Regulatory and tax incentives

Taxes may hurt when it swallows a part of your investment returns. An added advantage of green bonds is that they come with tax incentives. Since green bonds are built exclusively to develop projects that are beneficial to the society, green bond holders enjoy tax exemptions and tax credits, making it more attractive compared with traditional bonds.

In order to classify a bond as a green bond, it must go through a process of third party verification to ensure that the proceeds are directed towards environment projects. Institutions like the International Capital Market Association’s Green Bond Principles and the Climate Bonds Initiative’s (CBI) Climate Bond Standards help in this classification. Green bonds are usually governed by the following principles:

● Use of Proceeds — issuer should specify the category and clearly mention the definition of environment benefit of green project towards which the proceeds will go.

● Project Evaluation and Selection Process — issuer must give an overview of its investment decision making process

● Management of Proceeds — proceeds should be managed through a sub-portfolio or attested to by a formal internal process that should be disclosed

● Reporting — details of investments made from proceeds and environmental benefits achieved should be regularly reported.

Feasibility and challenges in issuance of green bonds

The above principles ensure transparency in the use of proceeds which would help investors in making the right decisions for their investments. However, often the reporting standard is weak in the bond market. Since the value of the bond depends on a number of factors including complexity of the deal and issuer’s risk profile, it leads to variation in the cost of issuance. Low value issues in developing countries sometimes make other financial options more affordable.

Growing focus and impact assessment of green bonds

It is evident that green bonds have started to gain popularity as there has been greater awareness towards environment issues and climate change. The market is still new and it has a lot of potential to evolve along with the economic environment. Its direct impact lies in the performance of the underlying project and has the potential to drive nations towards net zero. Several multilateral development banks have adopted a harmonized framework for impact reporting of green projects which is expected to allow a more stringent measurement of impact. Transparency, agreed standards and principles, Measurement, Reporting and Verification (MRV) are important drivers of incentives.

As awareness about the environment is increasing, the green bond market will surely see a bright future. Even though it does not guarantee high returns, socially responsible investors are still investing in these tax efficient bonds to get the positive environmental returns. Green bonds will prove to be a promising instrument to achieve net zero along with some fixed income.

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

The Impactful Investing: Your gateway to exclusive financing opportunities via social entrepreneurship

by Sandeep Kumar

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In recent years, investors’ demand is growing and so is the need for sustainability. Modern investors now look out for investment options that not only increase their returns, but are also contributing positively to social and environmental issues. In order to make sure both the needs are fulfilled, the answer can be found in the field of sustainable finance. By funding social enterprises, investors can ensure that their money is utilised for the benefit of the society and also provides returns.

Sustainable finance for Social Entrepreneurship

For any enterprise it is important to ensure financial sustainability to carry out its operations. Social enterprises essentially try to maximise their profits in order to carry out programs that will help overcome social and environmental issues. Thus, social impact and positive financial outcome, both are equally important for such a firm. In order to achieve these objectives, sustainable financing is very important.

There are several ways in which social enterprises can raise funds- donations, grants, crowdfunding, loans. However, these methods come with some drawbacks or the other. They take time to raise funds, involve costs, or some kind of competition. Sustainable finance through impact investors are valuable to bridge the gap between social development and funding. Before we look into the benefits of impact investments in particular, let us understand what the different approaches are available in sustainable finance.

Different approaches – SRI, ESG, and Impact Investing

Different approaches in sustainable investment consists of following:

  • Socially Responsible Investing (SRI)

It includes a value based investment system, in which the investor avoids taking up options that are against his/her believes or value system. Example, a person who hates smoking would avoid investing in a firm that produces tobacco products.

  • Environmental, Social and Corporate Governance (ESG) Investing

ESG looks at the environmental, social and governance practices of the firm that would significantly impact the performance of firms’ finances, and thus the return on investments. The main objective of this approach is to focus on the financial performance of the investment.

  • Impact Investing

This approach weighs financial performance and positive social impact equally. Such funds are often used to support causes that are not directly addressed by public financial markets. 

How is impact investment different?

While the above three terms may appear similar, they are different. It is important to note that SRI and ESG investing involve publicly traded assets, whereas impact investing considers private funds. Impact investing is more transparent in terms of assessing how the investor’s funds are used. SRI and ESG are more of a screening process for social and sustainable investment; while impact investing focusses on actually generating a positive impact.

The Global Impact Investment Network (GIIN), defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. Impact investment is not just philanthropic, rather it combines it with rigorous analytics of traditional investing. This is achieved by expanding accessibility of goods and services to the deprived section of the society, or through the use of environment-friendly and inclusive production processes. Such investments also target a wide range of areas including agriculture, clean energy, health, education, infrastructure, etc. While public funds and philanthropic measures help in providing for the poor, the role of impact investing is to give them a push as they climb the income ladder.  

Positive Outlook of Impact Investing

The Global Impact Investing Network (GIIN), the impact investing market is estimated to be as big as $715 Bn in the year 2020. The survey also finds that investors report that their portfolios have been performing at par and even exceeding their expectations in terms of both environmental and social impact, as well as financial impact.

 Source: GIIN, 2020 Annual Impact Survey

A report by Impact Investors Council of India estimates that Indian impact investing has shown growth at 26% CAGR in the last decade (2010-2019). $10.8 Bn funds have been mobilized by 586 impact serving about 490 Million beneficiaries, most of which belong to low income communities who are underserved by traditional investors. Impact investments have seen a gradual growth over the decade, especially since 2018 with average deal size tripling from $5 Mn in 2010 to $17 Mn in 2019.

With such high growth rates and the effects of Covid-19 pandemic, investors are now making a conscious decision to move towards sustainable investing. Moreover, the growing number of fintechs and use of advanced technologies, make investing a hassle-free process for all. The adoption of modern and innovative techniques will further accelerate the future growth of impact investing.

Source: Impact Investors Council of India

Since the share of impact investment in financial services has grown over the years, it has helped in fulfilling SDGs of reducing poverty, creating jobs and economic growth, gender equality, industry, innovation and infrastructure. Every dollar invested through impact funding has been able to crowd in at least twice the commercial capital. Impact investing has played a significant role in funding Seed and Series-A capital, and also provided for about 70% of the later-stage financing. Indian impact investing is largely focused on financial services. This will help achieve the goal of economic growth, which will eventually serve in accomplishment of other SDGs including poverty alleviation, gender equality, zero hunger, etc.

Sector-wise Impact (Source: Impact Investors Council of India) 

Your ticket to a positive impact

As the Covid-19 pandemic has derailed the economy, there is greater need to focus on SDGs to get back on the track of development. A broader focus on social entrepreneurship and sustainable finance options is needed to bring the economy back on track.  Social entrepreneurship is always supported by the government, since it helps them to get to the path of development by bringing a change about a change in the social and environmental issues.

Impact investing is the modern way of obtaining the twin goals of greater social impact and financial return. It is gaining popularity as more people strive for sustainability. In the Indian scenario, majority of the impact based funding is focussed on the financial institutions that help achieve global goals of greater economic efficiency and poverty alleviation. Other areas that are served through impact investing include gender equality, clean and affordable energy, better well-being through education, health, sanitation, etc. So if you want your funds to grow by bringing a positive change in solving social problems, impact investing is the way.

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

Pension funds trying to change the world — is it justified?

by Sandeep Kumar

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Simply put, a pension fund or a pension pot is basically a pot of money that provides retirement income. So, when you and I retire, we’re going to need to live off the money. We might have saved up but right now when we are working, we can invest money into our retirement and that is where a pension fund comes in. It is a large sum of money that is being invested in order to pay you and me when we retire.

Pension funds often pool huge sums of money to be invested in capital markets like the stock and bond markets, in order to produce profit (returns). It represents an institutional investor that invests substantial sums of money in both private and public corporations. The primary purpose of a pension fund is to ensure that there will be enough money to cover employees’ pensions after they retire in the future.

The rise of pension funds

The “unseen revolution” altering corporate ownership in the United States is now evident to all, fifteen years after it was first documented. Around one-tenth of the equity capital of America’s publicly owned corporations is held by the 20 largest pension plans (13 of which are pensions of state, municipal, or nonprofit employees). In total, institutional investors — most notably pension funds — own over 40% of the common stock of the country’s large (and many medium) corporations. Public employee pension funds, which are the largest and fastest expanding, are no longer willing to be passive investors. They are increasingly demanding a say in the companies in which they invest, such as veto power over board appointments, executive salaries, and key corporate charter elements. Pension funds also control over 40% of the medium- and long-term debt of the country’s larger corporations, which is still widely disregarded. As a result, these institutions have become both the largest lenders and owners of corporate America. For years, finance texts have highlighted that the lender’s power is equal to, if not greater than, that of the owner.

One of the most dramatic power swings in economic history is the rise of pension funds as dominant owners and lenders. General Motors developed the first modern pension fund in 1950. Pension funds now have $2.5 trillion in assets, split about evenly between common stocks and fixed-income instruments, after four decades. These assets will continue to increase aggressively for at least another ten years, according to demographics. In the 1990s, unless there is a prolonged depression, pension funds will have to invest $100 billion to $200 billion in new resources per year.

Source: Financial Stability Board

 

 

 

Types of pension funds and its difference

There are two key types of pension funds. The first type is Defined contribution and the second type is Defined benefit.

Regardless of how well the fund performs, a defined benefit fund distributes a fixed income to the recipient. The employee contributes a set amount to the fund. These donations are invested prudently by the fund managers. They must outperform inflation while not losing the principal. The fund management must make a sufficient return on investment to cover the benefits. Any gap must be covered by the employer. It’s similar to an insurance company’s annuity. In this instance, the employer acts as the insurance company, bearing all of the risks if the market falls. Because of this risk, several firms have discontinued offering these policies.

In a defined contribution plan, the employee’s rewards are determined by the performance of the fund. 401(k)s are the most common of them. If the fund’s value falls, the employer is not required to pay out defined benefits. The employee assumes all of the risks.

The most significant distinction between a defined benefit and a defined contribution plan is the risk shift. The defined benefit is being rolled out because it is old school. Defined contribution on the other hand is around for the most part today. Most employers, companies, and individuals are likely to be on defined contribution pension schemes.

Country-wise comparison of pension funds

Globally, the quality of pension systems accessible to workers varies substantially. According to the Mercer CFA Institute Global Pension Index 2020, the Netherlands has the best system, whereas the United States is nowhere near the top.

· Netherlands: Its retirement income system is based on a flat-rate public pension and a semi-mandatory occupational pension tied to wages and collective bargaining agreements. The majority of employees in the Netherlands are members of these occupational plans, which are defined-benefit plans that are industry-wide. Earnings are based on an average over a lifetime.

· Denmark: Denmark features a public basic pension system, an income-related supplementary pension benefit, a fully funded defined-contribution plan, and required occupational pension plans.

· Israel: The retirement income system in Israel is made up of a universal state pension as well as private pensions with the mandatory employee and employer payments. Annuities are typically paid via the private pension system.

How pension fund diversifies its investments

By shifting their concentration to other assets, pension funds can protect themselves from a stock market meltdown. Most pension funds have typically sought growth by investing in shares, but with global stock market valuations so high, the short-term outlook appears dismal. Alternative assets, such as private credit, private equity, and real assets, may outperform a standard growth portfolio on a risk-adjusted basis.

Investors are shifting their focus to alternative credit investments in search of yield due to low bond rates and scheme demographics. As contributions fall, a growing number of schemes become cash flow negative, putting an emphasis on income-generating assets while requiring forced sales of growth assets.

Because interest rates on traditional assets like gilts and investment-grade bonds are so low, trustees are looking into alternative credit markets like high yield, private lending, royalties, and long-term leasing.

 

Performance of pension funds during the financial crisis

  • The funds’ investment performance all suffered in the early aftermath of the pandemic’s outbreak. Their returns, on the other hand, have fared “significantly better” than they did during the global financial crisis when they fell far short of their standards.
  • The funds’ ability to withstand shock was aided by the swift and unprecedented monetary and fiscal support provided in response to the rapid spread of Covid-19. However, improvements in the asset class mix and risk management capabilities of the funds also contributed to the funds’ ability to withstand shock.
  • Since the financial crisis, pension funds have extended their exposure to alternative asset classes such as private equity, infrastructure, and real estate, which has helped to mitigate the risk of their public assets.
  • In addition, the robust liquidity positions of pension funds have helped to protect them from market volatility.
  • During the market upheaval in the first half of 2020, these funds had minor liquidity stress, in contrast to the previous financial crisis. We feel that since then, advances in risk management governance mechanisms have been effective in protecting funds from market volatility.

Source: OECD website

 

How pension fund tackles inflation?

Inflation protection refers to assets that tend to appreciate in value when inflation rises. Inflation-adjusted bonds (such as TIPS), commodities, currencies, and interest-rate derivatives are examples of these. Although the use of inflation-adjusted bonds is frequently justifiable, some have expressed worry about the greater allocation of pension fund assets in commodities, currencies, or derivatives due to the additional idiosyncratic risk they represent.

Liability matching, sometimes known as “immunisation,” is an investing technique that compares the timing of predicted future expenses to the timing of future asset sales and revenue streams. The method has gained traction among pension fund managers, who use it to reduce the risk of a portfolio’s liquidation by matching asset sales, interest, and dividend payments to planned pension payments. This is in contrast to simpler techniques that aim to maximise return regardless of when withdrawals are made.

To supplement social security payments, pensioners living off the income from their portfolios, for example, rely on secure and consistent payments. A matching strategy would entail buying stocks strategically in order to receive dividends and interest at regular periods. A matching strategy should ideally be in place well before the retirement years begin. To ensure that its benefit commitments are met, a pension fund would use a similar technique.

Pension fund driving sustainable investing

Pension funds might be a powerful force in persuading businesses to embrace ESG goals such as tackling climate change and increasing employment justice. However, they must balance these objectives with their fiduciary responsibility to protect their members’ retirement savings. They must also overcome obstacles in the United States, such as gaps in ESG adoption measurements and misunderstanding about government restrictions on such investments. According to the paper, total assets managed by U.S. institutional investors using ESG principles have increased significantly over the last 15 years, reaching $6.2 trillion in 2020, with public pension funds accounting for more than half of that (54%). Climate change and war risks in terrorist or repressive regimes have recently risen to the top of investors’ concerns, followed by tobacco usage, corporate governance, and sustainable natural resource and agriculture practices. Investors’ appetites for ESG principles, on the other hand, oscillate between extremes.

According to the Wall Street Journal, ESG fund investors are moving their focus from growth to value companies, while other institutional investors are “lining up trillions of dollars to support a shift away from fossil fuels.”

Conservative risk measures

Pension funds make guarantees to their members, ensuring that they will be able to retire with a particular level of income in the future. This means they must be risk-averse while simultaneously generating sufficient returns to cover the guarantees. As a result, together with blue-chip stocks, fixed-income instruments make up a large portion of pension portfolios. Pension funds are increasingly looking for additional returns in real estate and alternative asset classes, albeit these assets still make up a modest portion of their overall portfolios.

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This article has been co-authored by Sayan Maitra and Yogesh Lakhotiawho are in the Research and Insights team of Torre Capital.

Paytm: What you need to know about the Indian Payments Solution Giant, and the would-be Billion Dollar IPO

by Sandeep Kumar

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Paytm or Payment through mobile is India’s leading payment processing, commerce, and digital wallet application. It’s a brand of the parent company One97 Communications and was launched by Vijay Sharma in 2010. The app allows you to carry out various transactions from paying your local vendor to paying your electricity bill and much more. It started as an online payment and recharge service and transformed into a virtual and marketplace bank model providing several services like mobile banking, recharge, online marketplace, etc. Paytm has catered to more than 250 million users in the last 8 years. It has the capacity of handling more than 5000 transactions per second.

Snapshot

How does Paytm make money and its revenue stream?

Paytm was initially launched as a bill payment and mobile recharge platform, later it introduced several other services on its platform and came up with the concept of Paytm Wallet, Payments Bank, and online marketplace.

 

Cost structure

Paytm serves a large number of users, which is why it is so cost-driven. Its platform and customer acquisition account for the majority of its costs. This is a common expense faced by many organizations around the world where the cost of acquiring new customers is very substantial. The amount of money spent on this process is more than the returns earned.

 

Valuation and funding history

Global peer comparison

The story so far

According to data released by the National Payment Corporation of India (NCPI) number of digital payments per capita currently is 22.42 per month. The cumulative value of transactions made through payment gateways stood at INR 29.5 Tn ($40 Bn). Also, the payments sector has the highest number of fintech startups. According to IBEF Digital payments in India are expected to increase over three-folds to INR7092 Tn ($100.61 Tn) by 2025 on account of government policies. Mobile payments will drive around 3.5%of total digital payments of INR7092 Tn (US$ 100.61 Tn) by the financial year 2025, up from the current one percent.

Market scenario

India had always been a cash-obsessed economy and now it’s one of the leading countries adopting technology and digitization across its industries. The digital payment market, though adolescent is exciting. Both the public and private sectors are going through rapid digital transformation driven by the increasing use of mobile internet and progressive regulatory policies. The sector has been evolving since demonetization and the pandemic has accelerated the digital shift. A coming couple of years will witness a completely new way of how money moves within the Indian economy.

Impact of e-commerce

The growth of e-commerce along with the emergence of digital wallets played the role of catalyst for digital payments. The e-commerce payments market historically dominated by cash is evolving to meet the demands of its increasingly smartphone-led online shopping culture, with cards and digital wallets rising in prominence. Cards are the most commonly used online payment method despite the fact that credit card penetration per capita is 0.02 and debit card penetration is 0.64. Digital wallet is the fastest growing method and accounts for more than a quarter of all e-commerce payments. To lure the consumers, the digital wallets doled out lucrative offers and cashback to get consumers on board using the payment channel.

Market competition

The market is a highly competitive one with that the NCPI of India has set out new guidelines for digital payment apps limiting their share in the overall volume of transactions on the unified payment interface at 30%. The UPI segment is dominated by PhonePe and Google Pay who have a combined share of more than 80%. The digital wallet segment is completely dominated by Paytm with close to 50% market share. Paytm has taken an integrated route by adding multiple services in its portfolio such as lending, Insurtech, Weathtech, payments bank along with EDC terminals, gateway aggregator & e-commerce. Similarly, PhonePe is offering Insurtech and Weathtech, and Google Pay will be entering into lending and Insurtech.

Value propositions

Paytm offers a variety of services some of the prominent offerings are recharge, top-ups, tickets, hotels and etc. It then diversified into new services like the digital wallet with a match-making model. The two customer groups of the company are the individual account holders that deposit money in the wallet and the merchants who accept the payment. To increase the attractiveness and adoption of various new lines of services targeting the two customer bases were started:

Value creation

Companies are benefitted from the ability to receive a wide range of digital payment methods, both online and in-store. Along with the more traditional ways like debit and credit cards, this also includes a few nascent innovations such as QR codes, Paytm’s own digital wallet service, and United Payments Interface.

Future plans, innovations, and alliances

Paytm is en route to becoming a full-stack financial services provider. Setting up the digital bank and venturing into Weathtech and Insurtech, the company has entered into quite a few key strategic partnerships. To forward their Insurtech plan the company acquired Raheja QBE General Insurance Company, a provider of general insurance plans. Paytm also strengthened up its credit offerings by tying up with SBI Cards to provide contactless credit cards. Paytm Payments Bank was proactive in entering into a partnership with ride-hailing companies like Ola and Uber. This will empower more than 1 lakh driver-partners to conveniently use Paytm FASTags and seamlessly commute across the country, according to Paytm.

Digital gold

Owing to the digitization of the Indian gold market in recent times, Paytm has collaborated with MMTC-PAMP (a well-known gold refiner), to provide a safe platform for its users to purchase, sell and store digital gold. Paytm claims to facilitate the purchase of 99.99% pure gold for as low as Re.1 and store them at an insured vault for no cost.

Conclusion

A mobile wallet’s value proposition includes not only the payment services but also the value-added services that can be provided in a mobile-enabled environment. In a fast-changing and extremely competitive world, no one wants to be left behind in the fight for customer acquisition. Paytm has evolved rapidly and has earned a name for itself in the Indian financial and business sectors. The fact that it grew from a small startup to a massive corporation in such a short period of time demonstrates the further opportunities for growth in the digital space and how innovation is being used effectively in India.

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

 

“All that glitters is not gold” — Growing valuation bubble of Indian start-ups

by Sandeep Kumar

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 The valuation game

The Venture Capital valuation is a simple game, but never an easy one. While there is little to learn, to play it perfectly takes years, if not decades of experience under the belt.

So how do the VCs arrive at that valuation figure? Market Opportunity? Product Market Fit? Strong Founder Team? Disruptive Product Offering? Extensive Network Economics?

Nah.

Capital invested divided by the stake diluted. That’s it!

The VC chooses the amount of capital he is ready to deploy and the stake he wants to have in the company. Of course, the wish is to part with the least capital for the most stake. Now coming up with these two numbers, the capital chunk to invest and the amount of stake to buy, this is where experience comes in.

The winning bet in your portfolio

Most VCs have personal favorite ranges which they are comfortable with. Some VCs may like to hold only a few concentrated bets while others may want to deploy small amounts into numerous startups. The premise is the same. Each VC wishes to hold at least one winner in its portfolio, the winning bet that ‘returns the fund’.

This gets us to staging. The valuations do nothing to the VC portfolio, except increase the unrealized returns section, which, as the name suggests, are ‘unrealized’ and don’t mean anything unless the company makes an exit from that valuation.

But what if the company is not yet ready for an IPO or a buyout?

The VCs of course know this. Hence when they get together to finance a startup at some stage, let’s say series A, they are offering just enough money to take the startup to the next funding stage. This continues until the IPO or buyout.

Nowhere do the VCs use the DCF or any other model to find a fair value of the shares of the startup. Startup valuation is not a valuation game, it’s a pricing game. It is not about finding a startup trading at a lower than its fair value price and hoping the market corrects itself, the game is about finding another buyer who will be ready to pay higher. All this has nothing to do with cash flows generated from the assets held by the startup, adjusted for the underlying risks of all sorts (DCF basically). All these valuations are nothing more than exhaust fumes as suggested by Fred Wilson, an NYC based VC:

“Early-stage valuations aren’t valuations. They are the exhaust fumes of negotiation about two things — the amount raised and the amount of dilution.”

The information asymmetry

Now let’s take a look at what we have: You are a VC that is trying to get a stake in some startup. What do you do to get an idea of how much you should pay? You don’t have DCF or any other model to help. So, you look at what similar companies have been valued at. With new business models operating in diverse geographies, you realize that it is hard to say how you can define a similar company. Let’s say you came up with food delivery as one category. Despite the difference in the business models, one can hardly cobble together a list of 4–5 startups in the Indian space.

So, the VC game is plagued with opaque, inconsistent deal information. While the figures the VC arrives at are most probably wrong and have nothing to do with reality, they have nothing to worry about as long as they are able to find someone who’s ready to buy at a higher price from them.

The Indian startups in numbers

The past few years have been a gala time for the Indian startups who have managed to secure funding unabated despite the pandemic and its blues.

Startups in India managed to raise $7.8 Bn until April itself. This is a significant number almost 70% of the total $12.1 Bn raised in 2020 and more than 50% of $14.2 billion raised in 2019.

The average funding size has increased to $25.21 Mn, up from $14.94 Mn in 2020. There have been 402 funding rounds until April itself, against 1,114 deals in 2020 and 1,036 in 2019.

Overvaluation and the global landscape

The push towards absurd overvaluations has been a result of the negative interest rate environment. Post the GFC, there was heavy lending and even more borrowing. So much so that people had to pay up money just so that they could lend money. Of course, this led people to look for alternative avenues to park their money and generate juicy returns. The baseless optimism and hollow belief in spotting the next Bezos, Zuck, or Musk have led to an audacious amount of money flowing in, creating completely senseless valuations, having no roots in reality.

Tesla, more than $13 Bn in debt at the end of last year, recently had a market capitalization of $160 Bn, greater than General Motors and Ford combined. At the IPO price, Square was valued at close to $3 Bn, which is 50% below the $6 Bn valuations for which it had raised money from private investors a year before. Uber which in accounting terms stands at around 5x times its revenues, is also grossly overvalued as it is nowhere close to being the leader in the driverless car’s space. WeWork tried to go for a $47 Bn listing but ended up getting corrected to $8 Bn.

The WeWork fiasco was dubbed as a wake-up call in a Morgan Stanley report stating that the days of ‘’ were over.

Unicorns were considered rare. Today, however, the United States has a herd of more than 100 of them, with 100 more outside the US. Each worth a billion dollars or more.

Will history repeat itself?

Let’s talk about the Indian scenario and the startups which we believe are overvalued and most likely to come back to their intrinsic value as and when the markets correct themselves.

1. Byju’s: World’s most valuable Ed-Tech Company

Byju’s operates an online learning platform. It also creates a mobile app for pupils that offers a variety of learning activities. Exam preparation classes are also available. Original material, watch-and-learn movies, rich animations, and interactive simulations are all available to users on the site. The firm is having an EV/Revenue multiple of 17x.

It is the only major player in the Ed-Tech space in India, which has led the company to raise multiple rounds of funding and leading to an enormous increase in valuation. Knowledge in today’s world is free, however, Byju’s creates unique content with animation and the product often seems to be overpriced. In recent times there were a number of instances on various social media platforms where people questioned the pressure on the sales team and how Byju’s is so concerned about their sales when they try to push their offering in the market.

In the long run, the expected return from Byju’s is questionable. Below is the chart of the revenue and valuation of Byju’s over the last five years.

2. Cred — The borrower’s messiah

Losses in billions of dollars are nothing new for hyper-funded companies, especially when they’re chasing size and consumers at any cost. CRED’s metrics tell a tale in and of itself. CRED has made a profit of $71,000 in its second year of operation. CRED hasn’t been able to monetize its user base in FY20, despite acquiring a large customer base with a high propensity to spend and consume.

While the two-year-old company’s sales remained low, its total expenditure increased by more than 5.9 times to $52 Mn in FY20, compared to $9 Mn in FY19. The greatest cost center for the financial firm was advertisement and marketing, which accounted for 47.6% of total expenditure. From $3 Mn in FY19, such costs increased by 9.3 times to$25 Mn. During the fiscal year that ended in March 2020, CRED spent Rs 726.7 to earn a single rupee of operating revenue. CRED’s yearly loss in FY20 was INR 360.3 Crore, up 5.9 times from the $8 Mn it lost in FY19. The current cash burn is difficult to sustain, with an appalling EBITDA margin of -1979.5% in FY20, and the company will have to focus on its collections.

Despite registering astronomical losses it has attained a unicorn status by raising its valuation to $2.2 Bn in 2021. It is worth noting that the company is founded and led by Kunal Shah who is a known name in the start-up world for founding and leading numerous companies which may be an explanation behind the astronomical valuation of Cred. The graph below shows the valuation and losses of Cred over the years.

3. CarDekho — India’s leading car search venture

CarDekho helps users buy cars along with expert reviews, detailed specs, and prices, comparisons as well as videos and pictures of all car brands and models available in India. It has recently acquired an auto marketplace, Carmudi (Philippines) in late 2019 to expand business in Southeast Asia. GirnarSoft, the parent company of Jaipur-based automobile-related services behemoth CarDekho, has seen its losses increase by 155% to $45 Mn in FY2020. This comes after the company’s losses had already increased by 39% in the previous year.

Despite that CarDekho has managed to raise its valuation. Last year, Cars24, a CarDekho competitor, increased its consolidated revenue to $418 Mn and achieved unicorn valuation, and has a much lower EV/Revenue multiple. Let us now see the EV/Revenue Multiple of the peers in this game through the table below.

As per the last reported revenue and valuation figures.

We can infer from the table that CarDekho has a huge EV/Revenue multiple which signifies that the valuation of the firm is increasing at a much faster rate with respect to the revenue that the company generates, leading to overvaluation of the company. The graph below shows the valuation and revenue of CarDekho.

4. Unacademy

Unacademy is a Bangalore-based educational technology startup in India. Unacademy lessons are available in the form of Live Classes, which are both free and available on a subscription basis. Unacademy earned $12 Mn in revenue but spent $53 Mn, resulting in a loss of INR 300 crore. Employee benefits accounted for 23.7% of the edtech start-up’s costs, while other expenses accounted for 75%.

While 2020 brought plenty of development, the corporation would need to significantly increase its expenditures to reverse the losses it had in the fiscal year 2020, which ends on March 31, 2020. Unacademy’s revenue in FY21 is estimated to be over $55 Mn. It’s worth $3 Bn or approximately 35 times the expected income. The graph shows the valuation and loss of BharatPe.

5. BharatPe

When we talk about e-commerce giants, PayTm, Amazon, and Flipkart all wanted payments to take place within their own closed networks. BharatPe’s goal was to achieve what all the large brands were afraid to do: simplify things for retailers by adopting a standardized interoperable QR code. It allowed shops, street food vendors, and tea vendors to accept payments using any UPI app (PhonePe, Google Pay, PayTM, and so on) without having to download the apps. It was a simple and cost-effective approach with an added layer of security. The payment system’s complexity was reduced by a factor of ten by combining multiple UPI apps into a single sticker.

BharatPe was able to achieve early success by keeping things simple. BharatPe’s product strategy is based on making things simple for merchants, and the company uses P2M transactions as a springboard for future services. Because BharatPe does not charge merchants a setup or transaction fee, its fundamental feature money collection using QR codes is essentially a loss-maker for the company. It must spend a large amount of money to manage the servers that process millions of transactions every day. However, this provides BharatPe access to merchants who are passionate about their products and eagerly accept their offers. Despite having no visible revenue stream and without even earning a penny, the valuation of the company is increasing, and currently, it stands at $900 Mn, very close to the unicorn status. The graph shows the valuation and revenue of BharatPe.

The apprehensive loop of growing valuations

The indications are all too familiar. With large markets, illustrious founders, rapid growth, and top early-stage VCs on your side, you have a good chance of raising the next big round, even if you don’t yet have unicorn status (the desired billion-dollar value). And when major acquisitions are made for unproven companies, and valuations double or triple in a matter of months, it begs the question: are we in a bubble? This is always a challenge because most people only realize they were in an economic bubble after it has burst in the past.

Rich valuation multiples have also spread from the typical suspects — consumer internet companies — to enterprise software providers. This is a first. SoftBank, for example, invested in Mindtickle last year, valuing it at $500 Mn based on estimated revenue of $20 Mn — $25 Mn. Even SaaS companies in the United States, including Slack, Zoom, Snowflake, and Cloudflare, have gone public in recent years with great success. Sentiment in India often comes straight from the United States, particularly in related industries and from funds that invest in both nations, including several of India’s leading venture capital firms. Startup valuations are also affected by how publicly traded firms trade if retail investors are ready to pay high prices for loss-making companies, whether banks financing a share issue can find enough at a given price, and so on. There isn’t a single bubble across the board. Because of the vast quantity of money available in the market, investors are willing to pay a premium for good business. But that should be done judiciously.

Investors beware

For the first time in years, it’s possible to claim that private markets are more logical than public markets. If stock markets are the yardstick, select pricey companies may not be overvalued. A closer examination of what constitutes a bubble, as well as what Indian entrepreneurs are doing, reveals a more complete picture. Growth investing has been positive in industries that have recovered quickly from the epidemic, and there has been a lot of interest in a few market leaders. At such levels, one would expect some amount of rationalization. Investors must evaluate the prospects and the future road map of a company before investing. As more investments flow into a company without a proper business model or less revenue, it results in overvaluation creating a bubble. Investors can lose a colossal sum by not choosing the right company.

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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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