Research

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.

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.

 

Investing in alternative assets and why you should care about them?

by Sandeep Kumar

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What is the meaning of a secondary market?

The private secondary market is the one in which stakeholders of private, venture-backed companies (employees, ex-employees and early investors) wish to transfer their shares to an investor in exchange for liquidity. The investor on the other side exchanges cash in return of shares of that private company. The sales proceeds go to the selling shareholder, not to the company.

A primary issue of shares is the source of equity for a given company. Primary issue happens when a company issues a new class of shares and grants those to employees (in the form of stock options) or sells them to investors in an event of fund raise. The employees and investors who own primary shares may choose to sell them in the secondary market, through Torre Capital’s marketplace.

How can you diversify your portfolio and expect higher returns by investing in the secondaries market?

  • Given the expense of going public (which can be significant in terms of time and resources) and the public markets’ short-termism (which can cause public companies to focus on quarterly earnings and not on long term growth).
  • Tech-Based companies have fewer reasons to go public than they did a decade ago, because of which the venture-backed technology companies are increasingly reaching $1B and even $10B valuations before they go public, which leaves less potential for public market investors. In the year 1999, US technology companies went public typically after 4 years but today, the average technology company IPO comes after a minimum of 10 years.
  • As the companies are taking longer to go public, their early investors and employees have to wait substantially longer for liquidity than they would have in the past.

There are many reasons why early shareholders of now valuable private companies might want to tap into liquidity through Torre Capital. For example, an early stage venture capital investor might want to return capital to limited partners ahead of the launching of a new fund. An early employee of a now late-stage company might want to sell shares to finance transactions like buying a house.

Torre Capital acts as an intermediary between the shareholders who need liquidity, and the investors who want investment exposure to proven technology companies before they ultimately go public or get acquired. If the company goes public, investors receive shares post the lock-in period (which restricts private company shareholders from selling their publicly traded shares, ranging between 6 months to a year). If the company is bought for cash, the investors are compensated for the same as well.

More than $50 Billion in value is estimated to be locked up in private, pre-IPO companies, and the secondary market is unlocking that value for investors who were previously unable to participate due to high minimums and restricted entry.

Who influences the pricing of the secondary market?

The investors who participate in the fund raise have an influence on primary market prices; secondary transactions are usually priced in relation to the most recent funding. The price is generally influenced by factors of supply and demand. If a private company has a high demand, its shares might trade at a premium in the secondary markets (in other words, the shares would be priced higher than the share price from the most recent funding). If the sellers of a particular security are more than its buyers, the shares might trade at a discount (lower than the share price from the most recent funding).

Apart from the influences of demand and supply, following are the other factors that can affect the price per share of private market securities:

a. Share Class: Two of the primary types of shares are preferred stock and common stock.

  • Preferred stock is a type of equity security that has certain rights over common stockholders. These rights may include, but are not limited to, liquidation preferences dividends, anti-dilution clauses, and managerial voting power.
  • Common stock is a type of equity security that is most frequently issued to founders, management, and employees. In the event of liquidation, preferred shares are generally given priority over common shares.

b. Discount for Lack of Marketability: A valuation discount exists between stock that is liquid and traded publicly, and stock that is illiquid and not publicly traded. Because Torre Capital’s offerings are relatively illiquid, it’s common for them to be priced at a discount to the most recent round of funding.

Why invest with Torre?

Torre Capital is a VC funded Singapore based Financial Technology company and a Registered Fund Manager in Singapore. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds. Our investment vehicles offer exposure to high quality global growth startups, private debt opportunities, and other thematic funds in the pre-IPO space. They are available to registered investors around the globe.

Our current customer set includes 500+ family offices and High net worth investors (CXOs, first and second-generation entrepreneurs). With the team composed of ex-Mckinsey consultants, Asset management veterans, and Digital experts.

Exclusive features offered by Torre:

  • Pre-vetted/ Curated funds
  • Low-minimums
  • Low and transparent cost
  • End-to-end digital

Who are the shareholders?

Shareholders include all angel investors, employees of the company, founders, or anyone who currently has equity in an eligible private company in the form of common shares, preference shares, stock options or restricted stock units. The following services are provided by Torre Capital to private company shareholders:

  • Opportunity to sell shares in the Torre Marketplace
  • Avail equity funding for your private company ESOPs

How does the Shareholder’s journey work?

a. For selling shareholders:

  • Register on the platform by providing a few basic details about your equity stake.
  • Explore the Torre Capital marketplace to submit your request. Our private market specialist connects with you to perform due diligence checks.
  • We offer the shares to our investor community and gather investment commitments. We also work with the company directly for a completely secure transaction.
  • Transfer documents executed and you receive the sale proceeds. Torre Capital charges a nominal transaction fee.

b. For shareholders who seek to avail equity funding:

  • Register your interest and submit your financing request. Find out how much funding you can avail.
  • Our credit experts get in touch with you to perform due diligence checks, understand your tax liability and underwrite the funding.
  • Depending on your company’s terms and agreement, the forward equity contract is signed and you receive your funds.
  • Share a portion of profits with us post liquidation event. In case of no liquidation event, you don’t have to pay us back.

Advantages of selling at Torre’s Marketplace:

  • Immediate Partial Liquidity.
  • Maximum benefit to shareholder: You only pay us in case of a liquidity event.
  • Get to keep your upside: If your company never meets a liquidation event, you still have received funding for part of your shareholding.
  • Minimized Risk: Upfront part funding and safety of investment till liquidation. 
  • Multiple asset class: If you own multiple classes of preferred stock, common stock, ESOPs, RSUs, you can sell them easily on the Torre Capital marketplace.

Who are the investors?

Currently only accredited investors as defined here are able to make investments through our platform (Investments are not open to US Citizens). With Torre’s platform, the opportunities are endless. You can choose to allocate capital across four different asset classes – equity, ESOPs, structured products, and funds.

How does the investor journey work?

  • Register your interest on our platform. We leverage our network to provide company specific offerings to all employees.
  • Reserve your interest. All IPAs issued post approval.
  • Shareholders agree to terms, sign a Forward share ownership contract.
  • Funds transferred to shareholders’ account. Company leadership informed of agreement with Torre Capital. Receive frequent updates.
  • Upon liquidation, receive principal and profits redemption requests raised to shareholders.

Advantages of investing at Torre’s Marketplace:

  • Exclusive access to high-growth startups: 20% – 30% discounted equity ownership in series D and above global pre-IPO unicorn/soonicorn shares leading to lower investments than secondaries.
  • No upfront cost: Zero transaction cost versus 10% charged by secondaries.
  • Attractive Returns: 3x – 5x better returns than direct secondary transactions.
  • Vigilant and protective measures: 3x collateral protection for initial investment till 80% downfall in stock value.
  • Faster cash-inflows: 3x – 4x faster return of capital than top VCs.

Torre’s Pre-IPO Fund

If you believe in the power of the Torre Capital platform for sourcing strong deal flow and you believe in the pre-IPO asset class, but you are not comfortable or otherwise do not want to select single names for investment, you should consider a managed fund investment. The Fund Series investment committee will select all investments, which are a curated subset of what comes across the Torre Capital platform.

If you would like your investment to give you diversified exposure to the pre-IPO asset class, but can’t commit to multiple $100,000 investments, a managed fund is a good option. You will get investment exposure to multiple pre-IPO companies that are carefully selected by the fund series investment committee.

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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.

ESOP Financing: Access the capital you need to exercise your stock options

by Sandeep Kumar

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Why ESOPs are given?

Employees are granted stock options for a variety of reasons. Stock options are more frequent in start-up companies that can’t afford to pay their employees significant wages but are willing to share in the company’s future success. In such cases, stock options are given to employees as part of their remuneration package. In some cases, the employee is also given stock options, which he can exercise at a later date/s, in order to ensure his long-term commitment. Employee stock ownership plans (ESOPs) assist to build a sense of belonging and connection among employees in addition to giving monetary benefits.

When a stock option is provided to an employee under an ESOP program, it is free. The ESOP scheme spells out the terms and conditions under which an employee can use his rights. After a specific lock-in time, which is usually more than a year, the employee’s option can be exercised.

How do they work – vesting portion

The right to exercise the option may vest in the employee at a later time. The “vesting date” is the date on which an employee becomes eligible to exercise his or her right to purchase shares. The rights may vest fully or partially over the vesting period.

For example, on 31 March 2018, an employee is granted 1000 options, which can be exercised in three phases: 20% at completion of the first year, 30% with completion of the second year, and 50% on completion of the third year from the date of the grant. So, in this situation, the vesting dates for 200 options are 1 April 1 2018, for 300 shares, 31 March 2020, and for the remaining 500 shares, 31 March 2021.

For such vesting, the plan may specify the same or a different grant price or exercise price. The grant price, or the price at which an employee can purchase a share from the company, is usually set and is significantly lower than the current market price of the shares.

It is not mandatory for the employee to exercise the option because it is only presented as an option with no obligation linked to it. In the event that the current price of the shares is lower than the exercise price, the employee can choose to execute the option or let it lapse. The employee is granted a certain amount of time to execute his option, after which his vested rights may lapse. The ‘exercise date’ is the day on which an employee exercises his option to purchase shares.

When options are granted, as well as when they are vested in the employee, there are no financial outflows or tax ramifications.

Exercising options: why, how much, and when?

If your current cash curve isn’t doing as well as you’d like, exercising stock options may be able to help.

Exercising, on the other hand, is an investment in terms of money. Is it therefore worthwhile to pay the price?

When executing options, you pay money to increase your cash curve. The more options you utilize, the more money you spend; nevertheless, the curve improves as you utilize more options.

The numbers will change depending on your situation. You boost your chances of making more money in the future by paying today. However, if your company fails, you will lose that money.

An employee’s option does not have to be exercised after it has vested in him. The employee has a certain amount of time to exercise his or her privilege. When an employee should exercise his or her options is a crucial subject from a financial and taxation standpoint.

The employee must pay the preset price for the shares when he exercises the option, resulting in a financial outflow. Because the shares cannot be sold unless they are listed on a stock exchange, the money is locked up until the shares are listed or the promoters offer you a way out. Furthermore, extending your exercise date has tax implications because the capital gain holding period begins on the exercise date. As a result, the decision must be taken carefully after considering the cash flow and tax implications.

You exercise your options and officially have shares

When it comes to exercising, you have complete control. As long as you work for the company, you can buy shares whenever you want, and you don’t have to buy them all at once. When you leave a company, you usually have 90 days to decide what you want to do next (a few companies extend this to 5, 7, or 10 years).

You can exercise closer to the exit and then pay for it with the money you earn, so there are no out-of-pocket expenses. However, there are a number of disadvantages to this method.

It’s a big decision to decide which tactic to use.

Your company exits – finally!

When a business closes, one of two things happens:

  1. It is acquired, which means that another firm buys it. Microsoft purchased GitHub, Amazon purchased Twitch, and Facebook purchased WhatsApp. It goes public, which means it sells its stock in an initial public offering on the open market (IPO). Slack, Uber, and Lyft have all done just that.

Employees usually have a 90- or 180-day ‘lock-up’ period after the IPO during which they are unable to sell their shares.

You can sell your shares for a profit if the company’s exit value is high enough.

Your alternatives would be pointless if you didn’t have a way out.

Determination of your shares’ exit value

Your cash curve determines how much money you’ll make if your firm goes bankrupt.

Your ISOs and NSOs are in place to make you money in the future. “Exit” was the moniker given to that particular day. This occurs when your firm goes public via an initial public offering (IPO) or is acquired by another company. The amount of money you receive if and when your company closes is dependent on how successful it has grown. Your company’s exit value is determined by its level of success.

Regrettably, the exit value is unpredictably variable. You’ll never know how much money you’ll make as a result of your efforts. The only certainty is that when the exit value rises, you will make more money.

When should you sell the shares?

Selling an ESOP stock is equivalent to selling any other type of investment. You must evaluate the capital gains implications as well as the need for liquidity when making a decision. The selection will also be based on the Company’s future prospects.

It’s also possible that the shares you purchased through an ESOP aren’t listed, in which case you won’t be able to sell them until they are, or until the promoters offer you an exit, which may or may not be under very favourable terms. It would be advisable to wait until the shares are listed on a stock exchange in this scenario.

Tax implications when exercising the option

The taxes of ESOPs have a common structure. It is subjected to two levels of taxation.

The employee’s option to purchase shares at the exercise price is exercised in the first stage. The shares are eventually sold in the second stage.

First stage, 

When an employee’s ESOP options are exercised, the difference between the exercise price and the security’s value is treated as a prerequisite in the employee’s hands. The employer must deduct tax from the employee who exercises the option at source, recognizing it as a prerequisite. If the shares are listed on any stock exchange in India, the value of the shares given to the employee will be the average of the market price (average of highest and lowest price) on the date the option is exercised. In that instance, the fair market value will be determined by the merchant banker’s valuation certificate. The certificate of share valuation must be no more than 180 days old from the date of option exercise. Even if the shares are listed outside of India, the Company must get a certificate from a Merchant Banker because such shares are considered unlisted for ESOP purposes.

Second stage,

When the employee sells his/her stock. Capital gains tax will be imposed if a sale occurs. Depending on how long the employee has owned the shares, the gains can be either long or short term. The holding time requirements for both listed and unlisted shares are different.

Starting from F.Y. 2016- 17, If the holding period is more than 12 months, the listed shares will become long-term. However, if the holding period is more than 24 months, unlisted shares will be considered long-term.

The period of holding begins from the start of exercise date and ends at the date of sale.

At present the long-term capital gains on listed equity shares (on a recognized stock exchange) is tax free, however, short-term capital gains are taxed at 15%. Let us explain!

When shares are traded through a broker the long-term capital gains are fully exempt under Section 10(38) of the Income Tax Act.  However, as per the newly inserted section 112A via Finance Act 2018, if the amount of long-term capital gain exceeds Rs 100,000 than the amount in excess of Rs 100,000 shall be chargeable to tax at 10% without indexation (plus heath and education cess and surcharge). However, the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1st April 2018. Moreover, such short-term capital gains shall be taxed at flat rate of 15% under Section 111A.

If the shares are not sold through the stock exchange’s platform, long-term capital gains are calculated by indexing the original purchase price. Indexed gains will be taxed at a 20% flat rate, plus any applicable surcharges and cess. Short-term capital gains are treated like any other form of income, and they are combined with other kinds of income and taxed at the appropriate slab rate.

For the purposes of computing capital gains, the cost of acquisition is treated as FMV (fair market value) on the date of exercise, which is taken into account for the purposes of perquisites of the options, rather than the amount actually paid by the employee.

Taxation of Foreign ESOPs

If a foreign company grants an ESOP to an Indian resident, the ESOP will be taxable in India. Furthermore, the tax regulations of the company’s home country, as well as the double taxation avoidance agreement, must be investigated in order to determine the actual tax implications. Furthermore, because these shares would not be offered on Indian stock exchanges and are unlikely to be listed in India, the long-term capital gains exemption under Section 10(38) or the concessional rate of 15% tax on short-term capital gains in respect of such shares would not be available. ‍ 

When you have incurred a loss

In case you have incurred a loss you are allowed to carry forward short term capital losses in your tax return and you are eligible to set them off against short term capital gains in the coming years. Long term loss on equity shares is a dead loss and has no treatment, simply because gains are not taxable as well.

Torre’s Offering: Non-recourse financing and how it benefits startup employees‍

Employees in private enterprises (like you) can execute stock options using non-recourse financing. Because the loan is non-recourse, your other personal assets are never in danger.

For example, if the loan is non-recourse, the lender accepts the risk and you are not required to put up personal assets as collateral, such as your automobile.

Before we get into the technicalities, let’s take a look at why financing is useful in the first place.

It’s usually better to execute your stock options as soon as possible rather than later. If your company grows, exercising sooner means paying less tax both during the exercise and after the IPO— which means more profit for you.

However, exercising options can be financially out of reach for many employees of high-growth businesses on the verge of an IPO or exit. Consider this: exercising options costs nearly twice as much as a household’s annual income.

Furthermore, as the value of start-ups rises, exercising options becomes more expensive and prohibitive. That’s because the higher your options’ 409a valuation, the more tax you could owe.

Non-recourse finance can aid in this situation. It works like a cash advance, allowing you to exercise your start-up stock options without having to pay for them out of pocket.

How it works?

The lender delivers you the funds you need to execute your stock options and pay your taxes. You wait for your company to go out of business. There are no monthly interest payments, unlike a traditional loan.

If your firm has a successful exit (such as an IPO), you repay the money you borrowed plus any fees. You owe nothing if your company does not exit or falls out of business entirely. The lender is responsible for the loss. Your other personal assets are never at risk because it’s non-recourse finance.

If you already own stock in your company, non-recourse financing might enable you to access cash for other financial goals, such as buying a house or diversifying your stock portfolio, without having to sell your stock.

Is non-recourse financing too good to be true?‍

So what’s the catch?

To summarise, non-recourse financing does not put your personal assets at risk, and the financing source bears all of the adverse risk. So, what’s in it for the financial service provider?

Case 1: The supplier benefits from your success: the more effective the exit, the better for everyone. In the end, the amount you owe is determined by the value of your equity.

For example, you have $100,000 worth of ESOPs and on a successful exit you gain $50,000 then a commission of 30% would be charged which is $15,000 plus the principal amount. Similarly, if your gain is higher let’s say $80,000 then you owe a charge of 30% of $80,000 that is $24,000 plus the principal amount, hence the amount you owe will be determined by your equity value at the exit event.

Case 2: The financing provider receives a share of your pay-out plus a return of the initial advance if you successfully depart (plus any interest).

Continuing the previous example along with the commission on profit x% of interest will be levied on the principal amount. Suppose you borrowed $80,000 for exercising the ESOP, x% of that amount will be charged as interest in addition to a $15,000 commission.

Case 3: The funding provider bears the brunt of the loss if the exit fails. There is no payoff for the lender to take a portion of, and you are not required to repay the original advance.

Carrying forward the previous example of $100,000 worth of ESOPs. Suppose, the exit the value of your position is $90,000 and you are in loss of $10,000. Hence, there will be no payoff to take commission and we will bear the loss without bothering the borrower. Plus, the borrower will not be required to repay the principal amount, nor his personal assets be liable.

We are ready to take such a risk because we are very selective about the companies we engage with —thus, the people we finance. As finance providers, we also diversify the risk by investing in multiple start-ups.

How Torre can help‍?

We’re on a mission to assist start-up employees and shareholders understand, maximize, and unlock their stock’s value. We offer non-recourse stock option exercise financing to help you reap the benefits of exercising your options early. We also offer financing alternatives that allow you to access the cash of your hard-earned equity prior to departure without selling your stock.

Electric Mobility: Why the pandemic won’t hurt the resilient EV demand in the global markets?

by Sandeep Kumar

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The nascent concept of Electric Mobility 

Electric mobility, or E-Mobility increasingly accounts for a large share of the global automotive industry and is changing the way the end-user comprehends mobility as a concept. Electric mobility, according to the definition of the German government and the National Development Plan for Electric Mobility (NEP) comprises all street vehicles that are powered by an electric motor and primarily get their energy from the power grid.

Drivers for adoption of this industry:

  • Minimized the use of traditional fuel
  • Reduced cost of high-capacity batteries
  • Shift in consumer preference towards EVs

Accessible market and impact of its growth

In 2019, electric mobility seemed poised to reach a tipping point. With more than two million electric vehicles (EVs) sold around the world, electric cars accounted for a record 2.5% of the global light-vehicle (LV) market. There were 10 million electric cars on the world’s roads at the end of 2020, following a decade of rapid growth. The global pandemic did cause a severe economic slowdown in the automobile industry. However, The EV market is much more likely to see a faster recovery and strong growth. EV charging infrastructure has also followed suit, last year it hit one of the biggest milestones by crossing the 1 million mark worldwide. Most of the new infrastructure has been built in China and Europe.  North America, with far less robust public subsidy and support, remains a distant third in the charging race.

 

Source: Bloomberg

New routes opening

Capital is the fuel for innovation and growth and the technological advance in the mobility tech has been able to attract it in abundance. Since 2010, venture investors have invested $148.4 Bn into mobility technology, with $44.7 Bn invested across 426 deals in 2018.This helped the capex heavy mobility businesses like Uber and Lyft in bringing innovations, and revolutionizing and disrupting the commercial transportation sector. Recent trends suggest that autonomous vehicles will be the next phase of disruptive mobility technology, with startups including Zoox and TuSimple poised to usher in a new era.

 

  • Regulatory policy: Governments have increased consumer incentives for EV purchases, often as part of stimulus. In Germany, for example, purchase-price subsidies for new EVs can amount to more than $10,000 per vehicle. In China, the purchase-price subsidy currently ranges from 16,200 to 22,500 RMB (approximately $2,350 to $3,265) by car.
  • Infrastructure Investment: In addition to subsidies and incentives, several governments and PE/VC firms have invested huge amounts in infrastructure and technology development projects.
  • Paradigm shift: In many countries the demand for EVs remained fairly stable during pandemic. EV manufacturers that offer online sales have seen particularly high demand since lockdown and social distancing measures kept people at home.

Miniscule presence of Electric Vehicles in India

Electric mobility was introduced in India in 2011 and over the last decade has been able to carve a space for itself in the mobility market, inevitably increasing its relevance in the lives of Indians. India is the fourth largest car market in the world and has the potential to become one of the top three in the near future – with about 400 million customers in need of mobility solutions by the year 2030.

Despite everything, EV industry in India is far behind, with less than 1% of the total vehicle sales. Currently, Indian roads are dominated by conventional vehicles and have approximately 0.4 million electric two-wheelers and a few thousand electric cars only.

 

The opportunities for Electric Mobility in the Indian Markets

Indian market has always prioritized mileage and upfront cost over all other factors. As a consequence, EVs were initially relegated to a very niche segment of the population. Another factor that contributed to this was lack of charging infrastructure.

However, recent technological development has attracted a plethora of entrepreneurs, ranging from budding start-ups to decades-old conglomerates. In addition to thisthey’re also creating new business opportunities for digital technologies like charging location finders and reservation applications, only on payments and ride-sharing services.

Ather Energy, a Bengaluru-based EV startup, develops and manufactures its own e-scooters, offers charging infrastructure through its Ather Grid, provides consumer services that include cloud software upgrades and new ownership models like subscription and leasing which are bound to attract customers. Backed by prominent names like Government of India’s Technology Development Board, Tiger Global Management and Hero Motocorp the company has attracted $166 Mn in funding.

Yulu,technology-driven startup, is solving the matter of first and last-mile connectivity. Yulu Miracle is a smart, dockless e-bike which is meant for urban traffic conditions. Yulu has collaborated with Delhi Metro Rail Corporation to supply their services in and around metro stations in Delhi. Mumbai Metro Region Development Authority has also signed an MoU with Yulu to supply e-bikes to Metro commuters at various metro stations within the city. The company is still in a nascent state and has managed to garner $54 Mn in venture funding from investors like Bajaj Auto, Binny Bansal and 3one4 Capital.

DOT, a Gurugram based EV logistics startup, supplies Electronic vehicles to major e-commerce and food-tech players like Walmart, Amazon, Grofers, Blue Dart, DHL, Lenskart, Swiggy and McDonald’s.

How the virus infected the industry?

The pandemic brought the fourth largest market to a screeching halt as operations were suspended due to government guidelines. China is one of the largest suppliers of EV components. Due to lockdown supply chains have been disrupted leaving a negative short-term impact delaying the adoption.

Another key risk is the falling crude oil prices. As social distancing norms and lockdown has forced people indoors the demand for crude oil has plunged. But this concern is much more valid in the shorter run.Oil prices in India are on a rise contrary to global prices which translates to higher running cost for traditional vehicles. In a price sensitive market like India this will encourage the shift towards Electronic Vehicles.

Significance and opportunities in an emerging market

A move to e-mobility can facilitate governments to go with international emissions targets (e.g., the Paris Climate Agreement). E-mobility can cut back the general energy needed by electrical vehicles and inside the transportation sector normally.

Benefits: Electrical vehicle makers (particularly in automotive) are always in the hunt to remain one step ahead than another. This often significantly results in immense numbers of innovations like improved energy potency, higher performance levels, and lighter vehicles, etc. To continue its widespread growth, the electrified vehicle should overcome vital challenges like battery autonomy, recharging networks, and its worth.

Challenges: Batteries area unit is one of the key challenges in automobile electrification. The problem lies within the raw materials from which the batteries area unit is made: carbon, lithium, and cobalt. Regions like Europe lack their sources of those minerals which is additionally dominated by China. Another challenge being the limited recharge points

Regulatory tailwinds to bring down cost and convenience hurdles

Considering the rise in congestion and the compelling need to reduce emissions, the governments have taken some decisive actions to encourage electric vehicles adoption. Countries like Germany and France have announced their plans to elevate the subsidies for electric vehicles. In an effort to boost electric mobility, the Chinese government has extended subsidies for electric vehicles until 2022 and created exemptions from purchase taxes.

China’s Ministry of Industry and Information Technology aims to augment the top line of electric vehicle sales, and has set a target for EVs to represent 25% of new vehicle sales by 2025. Tesla, BYD, NIO and Xpeng are amongst the major players in the EV market in China.

Many states in India are racing ahead through policy groundwork. Initiatives and campaigns like National Electric Mobility Mission Plan 2020, Scheme for Faster Adoption and Manufacturing of (Hybrid and) electric vehicles in India (FAME India), as well as [email protected] campaign are boosting the adoption of EVs.

Is the market open to adopting EV?

Yes, people are willing to make the sensible switch to EVs, provided there is a required infrastructure in place, policies that govern and support research development, charging infrastructure and skill development initiatives need to be undertaken. The provision of fiscal and non-fiscal incentives is often made, so as to increase the viability of EVs in the long run.These favorable policies are already having an impact on purchasing behavior and leading to more electric vehicle sales. Total electric vehicle registrations in Europe rose 127% YoY in July. Market forecast assumes electric vehicles achieve cost parity with gas-powered vehicles in 2025.

Does the performance justify cost?

Electric scooters are evidently more costly than their petrol counterparts and affordability comes at the price of shorter range, slower speed and inadequate service. However, an electric scooter will offer the same mileage as a petrol scooter at 15% of the cost of one liter of fuel, making it very pocket-friendly over the long-term. Relevance depends on the usage, they are a good option for short daily use, but they make little sense for long-distance rides with a limited number of charging stations.

The long-term route to Electric Mobility

Will the Electric Mobility market see continued growth worldwide? In addition to evaluating short-term changes, we should also understand long-term trends for EVs. Will regional differences continue to persist? If the current tailwinds for EVs in China and Europe continue, electric mobility could emerge from the COVID-19 crisis in an even stronger position than what was estimated pre-covid. In fact, regulations and incentives will likely propel EV market share in China to roughly 35 – 50 % and in Europe to 35% – 45%.

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This article has been co-authored by Ayush Dugar and Yogesh Lakhotiawho is in the Resarch and Insight team at Torre Capital.

 

A Comparative Guide to Alternative Investment Opportunities for Holistic Wealth Management

by Sandeep Kumar

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One of the key drivers of the boom in wealth management has been the rise of alternative investment funds (AIFs), essentially either structured products, cryptocurrencies, thematic funds, real estate funds, private debts, and other such, where HNIs make sophisticated bets on new investing strategies, unlike the conventional world of mutual funds that are used by millions of small investors.

Alternative investments represent approximately $13 Tn (or 12% of the global investable market). By 2025, the industry is expected to grow to $20 Tn – $25 Tn (18-24% of the global investable market). India’s alternative investment industry has grown by nearly 265% since 2017. But the industry is still underdeveloped relative to the rest of the world. As of June 2020, the industry is estimated at $54 Bn in India. The recent growth of India’s alternative investment industry can be highlighted by two recent developments. First, India’s private equity space took the spotlight when Reliance Jio raised $20 Bn via notable blue-chip investors and tech giants, despite the global Covid-19 outbreak.

Source: Grand View Research

A Camaraderie of Risk and Opportunities


An investor who is looking to diversify the investment risk in various asset portfolios. An ideal investor will be the one who is willing to take the underlying risk involved in these unlisted and illiquid securities. Usually, Resident Indians, NRIs, PIOs, OICs, and foreigners are eligible to invest in various types of alternative investments.


Structured Products

These are financial instruments consisting of three components:

  • A Bond
  • Multiple Underlying Assets
  • Derivatives

Depending on the investment objective of the structured product, the interest generated by the bond component is used to buy the derivatives. The underlying asset helps generate the return component. The derivative is of paramount importance in the construction of a structured product. Most of the time it is what determines the level of return. The choice of derivatives will depend on the:

  • desired risk level for the product (capital protection or not),
  • preferred investment horizon,
  • type of return and exposure sought, and market conditions

In the current time, structured products seem to be appealing for customers who try to optimize and diversify the portfolio of savings and achieve the target returns. But with a change of generation, the future holds place for investors moving for fast-paced money-making opportunities rather than the traditional buy and hold investments. The risk with structured products is the lack of liquidity that comes along with low returns and it can be considered more as a buy and hold investment. Along with the lack of liquidity, the potential loss of 100% principal is a huge risk involved.

 

Cryptocurrency

Cryptocurrency is a digital currency that can be used to buy goods and services but uses an online ledger with strong cryptography to secure online transactions. The highlighting characteristics of cryptocurrencies are:

  • Decentralized
  • Volatility
  • Trust-less

The global market of cryptocurrency in 2019 was approximately $792 Mn. The market is expected to grow at a CAGR of 30% and have a market capitalization of around $5100 Mn by 2026.

One of the most notable acceptors of cryptocurrency as a viable medium of payment is Apple Inc. PayPal, Starbucks, and Coca-Cola are amongst the other giants accepting cryptocurrencies.

It is also one of the most lucrative investment options currently present. Its value appreciation is supremely dynamic and can prove to be an excellent avenue for capital expansion.

When it comes to cryptocurrency, the investor sentiments are at all-time high currently. The biggest risk involved in cryptocurrency is the threat of cybersecurity including malicious activity. Loss or destruction of the private key will lead to a 100% loss of principal.

Overall, it is wise to place your bet on crypto in the coming era, keeping in mind that there might be periods of underperformance from time to time.

Thematic Funds

Thematic Funds are equity mutual funds that invest in stocks tied to a theme. Currently, SBI Magnum COMMA Fund and Aditya Birla Sun Life MNC Fund are the most popular thematic funds in India. The idea is to concentrate on making a portfolio with one core element of the economy. Exposure in different sectors helps to partially diversify the risk. It is less risky than sector-focused funds.

Thematic Funds are equity mutual funds that invest in stocks tied to a theme. Currently, SBI Magnum COMMA Fund and Aditya Birla Sun Life MNC Fund are the most popular thematic funds in India. The idea is to concentrate on making a portfolio with one core element of the economy. Exposure in different sectors helps to partially diversify the risk. It is less risky than sector-focused funds.

The practical application of thematic funds can be seen as wealth managers create different portfolios as per the theme that the investor wants to focus on. For example, outdated industries use more suitable examples like fintech, supply chain, or SaaS. 

However, if you are a very conservative investor, you may not consider investing as these funds come with higher levels of concentration risk. You must have an investment horizon of at least 5 years to mitigate the associated risks.

A mid to long-term investment trend should underlie the investment rationale behind thematic funds. Let us understand how thematic funds are a good investment with an example. Due to Covid-19, we saw a boom in the healthcare, pharmaceuticals sector. Considering the Covid-19 is going to stay a bit longer than expected, there will be an increasing demand for healthcare.

Thematic funds should concentrate more on investing in the specific companies which stand to benefit from this boom- like healthcare, pharmaceuticals, medical instruments manufacturers, etc. Similarly, hybrid and electric vehicles might be the road runners for tomorrow. So accordingly, thematic funds would look forward to investing in those specific sets of companies. Ideally, thematic funds should constitute 5- 10% of your portfolio if you are an aggressive investor willing to take higher levels of risk.

 

Real Estate Funds

A real estate fund is a sector fund that invests in securities of companies that invest in real estate projects. Investors get broad exposure to real estate for a low investment level. A Real Estate Fund can comprise investments either directly in real estate companies or in Real Estate Investment Trusts.

Some of the characteristics of real estate funds are:

  • Long term investment
  • Returns depend on the growth of the sector
  • Liquidity to investors, which is not the same if invested in physical real estate

With inflation on the rise, the prices of properties will increase which in turn will increase the value of real estate making it a protected investment for the investors willing to invest their money into long-term investment plans for at least 5 years. And the people who are in search of quick returns might not fit as suitable investors for these funds. Overall, they are being seen in a more traditional light, due to new opportunities. Present case on their growth opportunities and are they still relevant post covid.

The two common risks with these funds are the market risk of the real estate sector and the interest rate risk. Retail investors have a large amount of disposable income so investors like them can consider real estate funds for a diversified investment portfolio.

Private Debts

A private debt fund specializes in lending activity and raises money from investors and lends that money to companies. It represents an alternative to bank lending as well as providing investors with exposure to the more bond-like returns occurring from private debt as an asset class.

Private debt funds come in different shapes and sizes. For example, some private debt funds provide capital to sponsor-backed borrowers, others fund real estate development projects, and some invest entirely in the debt of distressed companies. By 2019, the assets invested into private debt reached a record high of $812 Bn and it was expected to exceed $1 Tn by 2020 but for the Covid-19 outbreak which slowed it down.

Private debt in Europe has grown by nearly 380% in the past decade and the Asian market has taken off in recent years. The lower volatility and regular cash income are really attractive to investors. Already one of the fastest-growing alternative asset classes, with total AUM rising 168% from $315 Bn in 2010 to $845 Bn in 2019, this growth is expected to continue with a 73% increase in AUM to $1.46 Tn by 2025. It is thus expected to become the second fastest-growing alternative, next to private equity, by 2025.

 

AIF as per Investor Risk Appetite

The Journey Ahead

The future of the alternative investment industry seems likely to be one of both growth and significant structural change, accompanied by an increasing maturity of the industry’s infrastructure, regulation, and investment relationships. The importance and need of the alternatives industry are likely to become even more evident to the public as individuals begin investing in the sector through retail alternatives, to strengthen the value of personal long-term investment portfolios. Ultimately, demonstrating the value addition that the industry generates and doing so in a transparent fashion will be the key to the industry being accepted by the public and policymakers. The Indian Alternative Investments Market still represents a minuscule share of the global market and is poised for unprecedented growth in the years to come.

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

 

 

 

 

NFT: An Opportunistic Future or a Bubble?

by Sandeep Kumar

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An NFT is an on-chain token of an off-chain asset. At the most bare-bones, it is a social contract between the asset creator and the surrounding community.

So, what makes it different from a crypto currency and what is this fuss about non fungibility. An NFT is a digital token that’s like a cryptocurrency but can’t be exchanged for another NFT. This is what makes it non fungible. A bitcoin for a bitcoin, but not one NFT for another. Each NFT is different and unique.

This token is added to a blockchain that supports this special ‘NFT type’ token (such as Ethereum) recording the details of ownership of some commodity, somewhat like how a house deed records the ownership of a house.

The only catch is the commodity, the off-chain asset, must be ownable and somewhat nonfungible. So, you can’t have an NFT on currencies or gold (non-fungibility), nor on Mars or Niagara Falls or the Mona Lisa (unless you own the Mona Lisa of course, then you can do whatever you want, also its highly likely won’t be reading this anyway).

Examples of NFTs Trades: 

  • Digital Art: The $590,000 selling of the famous Nyan Cat Gif, for example, could have only happened because of the meme’s enormous success over the years. 
  • Sports Collectibles: Similarly, the NBA’s highest-selling NFT was a highlight reel of LeBron James, which sold for $200,000. Less well-known players, on the other hand, had reels that sold for as little as $9.
  • Tweets: In March, Jack Dorsey’s original tweet sold for $2.5 Million, paving the way for more similar deals.

Why all this chatter on NFT then?

Because NFT allows storing more data per block. Bitcoin blocks allow only 1MB of data for example, just enough to record a bunch of transactions and some other details. 

This single feature elevates the NFT from more than just a ledger that records transactions (essentially what a cryptocurrency is) to record/store the ownership of pretty much anything such as jpeg files, music files, videos, internet domains, real estate, vintage cars, in-game purchases, art pieces, ad spaces, unlisted shares, horses, just anything.

So just to make things clear, if you are an artist, this is an easy way to monetize your work securely. NFTs also allow a share to the artist each time the NFT changes hands.

As a buyer, which you most likely are, you can buy NFTs of an autograph or highlight reels of an upcoming sports star that you think may strike it big. If in case that happens, it is likely the value of the NFT would have climbed manifolds.

Role of the community in guaranteeing NFTs

Unlike the fiat currencies that are legally backed by central banks, gold, governments and who knows what, a particular NFT only falls back on its scarcity to back it up (the other two tenets of an NFT are its utility and authenticity, both of which are not as effective as an NFTs scarcity is). The ploy of scarcity is a delicate one. The artist or NFT holder may not be able to enforce his ownership, may not get any special rights to own it, may very simply be fooled into buying that NFT or the creator may break its promise. It is the community however that enforces scarcity and hence values it. The creator of the NFT has no say in it.

The value of the NFT comes not from the NFT or the art or the off chain assets that it brings on the chain, it is the NFT and on chain assets’ community and its interactions that hold and/or derive value. It is not the NFT, but the community that is holding value. Most NFTs are worthless, but a few NFTs are focal points of creators and admirers both. Call it a digital bandstand or an art gallery if you wish. 

NFT “An Opportunistic Future”

  • NFT can be a new revenue stream for gaming, sports, art and technology.
  • Like Decentraland, NFTs can transform our attitudes toward ownership and make it possible to own a real-world asset that’s thousands of miles away.
  • Many crypto unknowns could introduce cryptocurrencies for the very first time through NFTs.

Risk associated with NFT

  • It may end up like the initial ICO (initial coin offering) craze as people’s attention shifted to other technology and the space cooled down.
  • What may seem like a hot commodity today may not be as so in the future as seen in the case of Jack Dorsey’s tweet.  
  • Complaints of several pieces of art being stolen and purchased as NFTs leaving the original art creators with no proof of their work.
  • NFT owners must also trust that the maker will not produce another batch of tokens with nearly identical artwork, devaluing the NFT they paid for.

Why the craze of NFT holds despite the associated risk? 

NFTs can be called collectibles. People buy paintings or any other kind of physical art for the same purpose. Utility, authenticity, and scarcity are typically the driving factors behind their demand. 

The obvious one is utility. People are willing to pay for an NFT ticket because it helps them to attend a meeting. Alternatively, they are more likely to purchase art if they can view it in a virtual environment. They’re also willing to spend money on an object that gives them unique abilities in a game. The definition of authenticity explains how an NFT works. What was the source of it? Who has owned it previously? Finally, Leonardo Da Vinci’s famous painting “The Mona Lisa” better describes scarcity. There may exist millions of copies, yet there’s only one original Mona Lisa.

The big player of the NFT market

OpenSea is the first and largest marketplace for user-owned digital goods, which include collectibles, gaming items, domain names, digital art, and other assets backed by a blockchain-based in New York. The number of unique participants after the bubble of 2018 has grown steadily from 8,500 accounts in February of 2018 to over 20,000 accounts in December of 2019. The market is driven by a core group of power users. On OpenSea, the median seller has sold $71.9 worth of stuff, whereas the average seller has sold $1,178 worth of stuff, indicating a large number of power sellers.

Market sentiments and perception

The market for non-fungible tokens is quite small (yet). It is also harder to measure than cryptocurrencies due to the lack of spot prices. Focussing only on secondary trading volume (peer-to-peer sales of NFT, not the creation of NFTs) as an indicator of market size the current secondary market is expected to be roughly $2 – $3 Million USD in volume per month on average.

The total trading volume of non-fungible token (NFT) artwork hit an all-time high of $8.2 Million in December 2020 compared to $2.6 Million in November 2020.

It might sound like a gold rush right now, but the main question is how long will value be produced in all of these new forms if the supply is unlimited? And what would be the most prudent position to take?  A good way to get a piece of the action, yet to stay unharmed is to service the bubble, not to take part in it. Case in point: do now what Levi’s or Wells Fargo did then. NFTs will tokenize everything. It won’t be long before off chain assets get on the blockchains. All valuable assets will then be stored on a decentralised digital ledger, with the NFT being a token of digital representation of an object or person on the chain.

 

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

SPAC – Building a Bubble of Uncertainty

by Sandeep Kumar

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SPAC popularity has quadrupled in the past year or two and is bringing a new wave in the investment sector, especially the celebrity engagement in the world SPAC worked as the icing on the cake. This uncertain bubble is growing huge, as the bubble of uncertainty.

Overview

SPAC named as Special Purpose Acquisition Companies was developed to avoid the old lengthy and costly way of moving with a traditional IPO process. But now it is getting misused to bring up incompetent companies to go public which does not have the necessary requirements to become public under any circumstances. The goal is to bring in capital and deposit into an interest-bearing trust account, the SPAC aims to buy an established privately owned corporation through a “business combination.” After a SPAC raises funds, it usually has two years to make an investment, with the possibility of an extension if enough SPAC stockholders vote to do so. If the SPAC is unable to reach an agreement within that time frame, it is required to refund the money to its investors, and the SPAC’s sponsor forfeits any initial investment. The investors have no clue about the company getting acquired.

Now Let us take a moment back and think, will you ever give a blank check to someone without knowing where is it getting spent. How many of us will do that? hopefully none. This is exactly what is done in SPAC and that is why it is called blank check companies. The investors pay without knowing and analysing as there is almost no way to perform a distinctive calculation to understand about the acquisition as there is no prior announcement of acquisition.

Risk from an Investor’s Perspective

Under securities law, only past financial statements can be disclosed in standard IPOs. SPACs, on the other hand, will use forward-looking forecasts to market the business mix. For fast-growing but not yet profitable businesses, being able to present forecasts will help them tell their story to investors. If you are an investor, then you know what happens when a bubble bursts.

Let us take a basic example and understand, if you could buy SPAC shares for $10 and then get approximately $10 back, what you’ve lost is the chance to put the money to better use elsewhere. If you as an investor, on the other hand, do not participate in the SPAC IPO. Instead, if you purchase stock on the open market, let’s take SPAC shares have been trading 50 percent to 75 percent above their IPO prices in recent months, even before they name an acquisition target. You won’t get your $15 back in liquidation if you buy a SPAC for $15 per share and it never makes a deal. You’ll get $10, which is a 33% loss. Akazoo, an AI music streaming company that was expected to merge with Modern Media Acquisition Corp in 2019, may be the most unfortunate of the failed SPACs. Instead, it was revealed that Akazoo’s previous management had falsified the books and records to a significant degree, effectively nullifying their claimed 5.5 million subscribers.

This is not new in case of SPACs. Despite this let us go through the celebrity industry involvement in SPAC making it even more popular sports figures Alex Rodriguez and Shaquille O’Neal, former house speaker Paul Ryan and the list is goes on. The count moves to 474 SPACs raising $156 Bn. After investing your hard earned wealth what you get is Ambiguous valuations, questionable disclosures and a misalignment of interests. SPAC is making the people minting SPACs rich and giving a hope to the investors to get rich later without a basis but a promise of gamble. It is often seen that the SPAC sponsor tends to wash off their hands by selling off their part of shares, as an investor what do you think is the confidence level that is getting reflected where the SPAC Sponsor sells off his part leaving other is dismay. The actual purpose of SPAC is getting diluted and is becoming a tool to just skipping the IPO process and going public with litigation risk is present as recent cases have demonstrated.

See, for example, Bogart v Israel Aerospace Indus., Ltd. (standing of SPAC sponsor to bring a claim for breach of duty to act in good faith); Rufford v. Transtech Serv. Partners, Inc. (challenge to fees being paid to SPAC sponsor); Welch v. Meaux (alleged securities fraud in connection with SPAC business combination); and Olivera v. Quartet Merger.Corp. (SPAC shareholder suing SPAC for failure to honour his redemption right). CEC Entertainment (owner of Chuck E. Cheese and Peter Piper Pizza) and Leo Holdings declined to combine in 2019. CEC executives gave no specific reason for the termination, but they did lose out on a $1.4 billion contract. Since then, the company has applied for Chapter 11 bankruptcy protection.

Performance of SPACs : The Numbers Game

Now let’s bring in numbers which is the ultimate factor for investors from August 2020, the 56 SPACs studied outperformed the S&P 500 by an average of 11 percentage points in the first three months following an acquisition, but lagged the broader market in the 12 months following the transaction. According to a separate study, SPACs under consideration that went public since 2015 have lost an average of 18.5 percent, with median returns of -36.1% compared to a 37.2 percent increase for typical IPOs. Table below consists of the recent SPAC (with definitive agreement) performance.

Name

Commons Price

% Change wrt 08/03/2021

Unit Price

Warrant Price

Colonnade Acquisition Corp.

$10.47

-12.97%

$13.45

$2.54

Alussa Energy Acquisition Corp

$10.49

-4.03%

$12.09

$2.22

Aspirational Consumer Lifestyle Corp.

$10.30

-4.01%

$10.95

$1.70

FTAC Olympus Acquisition

$10.47

-3.24%

$11.17

$2.27

10X Capital Venture Acquisition Corp

$10.33

-2.55%

$11.23

$1.57

Thunder Bridge Acquisition II

$10.36

-2.36%

$11.98

$1.99

NavSight Holdings, Inc.

$10.43

-2.16%

$11.05

$1.64

Vesper Healthcare Acquisition Corp.

$10.25

-2.01%

$10.80

$2.15

NextGen Acquisition Corporation

$10.31

-1.62%

$11.03

$2.12

Starboard Value Acquisition Corp.

$10.05

-1.57%

$10.26

$1.71

TPG Pace Tech Opportunities Corp.

$10.26

-1.25%

$10.71

$1.36

Fusion Acquisition

$10.37

-1.24%

$11.30

$1.56

Altimar Acquisition Corp

$9.95

-1.09%

$10.42

$1.57

Fortress Value Acquisition Corp. II

$10.07

-0.98%

$10.38

$1.40

Forum Merger III Corporation

$10.20

-0.97%

$10.88

$2.05

 

It is not surprising as a bubble when it grows beyond a limit it will burst. It might sound like a normal fact when I say Dozens of SPACs are trading below $10 at which the shares were sold assuming they are yet to announce their deals, but surprisingly many SPACs started trading at large premium to their cash holding, like Churchill Capital Corp.IV traded at $64 even before its deal with Lucid Motors Inc, which is a highly unlikely behaviour but it shares has fallen by 60% since then.  To continue the discussion let us look into the former financial disappointments by SPACs, one of the prominent example that comes to the mind is the case of Nikola Corp. so called rival of Tesla, which was targeted by Hindenburg announced that it would produce fewer than 20% of the electric trucks it has planned.

Based on our analysis all the forecasts made was turned into scraps, a complete financial disappointment. If that was not enough let’s see the case of Quantumscape Corp. and Hyliion Holdings Corp., former SPACs, have already lost 2/3rd of their value after attaining peak last year. The performance of SPAC post-merger is often disappointing.

Investors Beware

Let us see the upcoming facts in the world of SPAC, there were nearly 250 special purpose acquisition companies, or SPACS, that raised more than $83 billion in 2020, with an average size of $334 million. So far this year, 75 people have been counting. Walmart Inc.’s Flipkart is reportedly exploring going public in the U.S. through a merger with a SPAC as it aims to fasten the listing process, also E-commerce players like Grofers also are exploring ways to go public through SPAC. Now see the example and look from a investors prespective, it has a revenue of around 34 million USD, showing a increase of 54% in income but also has a 74.4% year on year increase in loss. Its revenue is no way even near to 100 million but is going public with presenting a forecast of growth in future. Would you Invest in it?.

It is an obvious fact that it can no way follow the traditional IPO method so coming in through the SPAC. Don’t you think SPAC is increasingly becoming a loophole rather than an effective tool of reducing the tedious process of traditional IPO. It should be conclusive of the fact that investors shall be beware and should examine and analyse whenever it comes to the point of investing in a SPAC before thinking it to be a highly profitable investment in near future, otherwise you may end up losing money. Fate of a bubble on growing beyond the threshold is inevitable.

 

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

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