Spotlight

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

by Sandeep Kumar

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Secondaries Market and its Performance during Pandemic

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

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

Historical Returns in the Midst of Pandemic

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

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

Why the secondaries market are attractive?

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

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

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

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

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

Source: Acuity Knowledge Partners

Secondary Buyouts

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

Source: Deloitte Insights

The Way Forward

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

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

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

by Sandeep Kumar

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Overview of European Fintech Market

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

Source: Crunchbase

Surge of Fintech Funding in Europe

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

Fintech Investments size in European Funding Round till H1 2020

Regulatory Environment

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

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

Growth in Europe’s FinTech Deals

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

Source: Crunchbase

Record Year for Fintech Exits

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

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

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

How are Different Segments Faring?

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

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

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

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

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

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

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

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

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

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

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

by Sandeep Kumar

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Understanding Security Tokens

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

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

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

Evolution of STOs and their Growth

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

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

How Do Security Tokens Work?

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

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

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

Types of Security Tokens and their Acceptability

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

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

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

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

How are security tokens transforming the private markets?

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

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

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

Benefits of Security Tokens

· Improves accessibility to real-world digitized assets

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

· Enabling Fractional ownership

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

· Provides Increased Liquidity

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

· Transparency

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

· Reduces Cost

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

Major projects in the STO space

· Tezos

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

· TZero

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

· Polymath

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

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

Developments that needs to be catered in the long run

· Wider acceptability

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

· Integrating systems and requirements

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

A glimpse of the future

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

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

Keep up to date with the latest research

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

by Sandeep Kumar

Keep up to date with the latest research

 

Secondaries Market and its Performance during Pandemic

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

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

Historical Returns in the Midst of Pandemic

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

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

Why the secondaries market are attractive?

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

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

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

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

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

Source: Acuity Knowledge Partners

Secondary Buyouts

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

Source: Deloitte Insights

The Way Forward

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

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

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

by Sandeep Kumar

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

Features that make Cryptocurrency Unique

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

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

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

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

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

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

Cryptocurrencies that are Leading the Market

Source: Statista

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

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

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

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

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

Source: statisticsanddata.org

Acceptance Around the World

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

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

Dark Side of Cryptocurrencies

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

Changing Regulatory Scenario

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

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

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

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

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

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

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

by Sandeep Kumar

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The emerging scope for institutional investors in the secondary markets 

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

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

VC Funds versus Mutual Funds – Which brings more liquidity?

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

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

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

What kind of unicorns do mutual funds invest in?

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

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

Source: Chernenko et al (2020)

Benefits of Mutual Funds that serve as gateway for average investors 

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

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

 

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

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

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

 

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

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

Source: Chernenko et al (2020)

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

 

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

Internet Of Things: Building a Connected World Through Powerful Technologies

by Sandeep Kumar

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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.

Supply chain tech: Creating Efficiencies in logistics through careful investments

by Sandeep Kumar

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A robust ecosystem for efficient growth

The Supply Chain Technology refers to any digital equipment used to simplify supply chain processes for shippers and carriers. The industry encompasses all the software and hardware solutions that help simplify and automate processes and facilitate information transfer within and across firm boundaries. Emerging SCT enables a truly integrated, visible and efficient supply chain that benefits from collaboration of business processes. The use of SCT by firms at every all the stages leads to enhanced financial performance, swift response to changes in process and other factors of the supply chain.

A supply chain is rarely a fixed system, the ecosystem keeps on evolving and especially now that supply chain technology is a major factor — supply chains these days are almost never static. For businesses to stay relevant and ensure profit maximization adopting SCT is a must. In today’s digital world supply chain is widely different from two decades ago. With the advent of technologies competitive advantages and productivity gains are being made.

A few key impacts of technology:

· Greater Efficiency: Well automated systems have always improved or augmented manual systems. But the new mobile technologies provide for an instant and complete data collection which is integral for analyzing and identifying operational anomalies.

· Improved Communication: Improved technology results in a tighter communication stream between the top level decision makers and the ground level workers. This makes the implementation of the process more efficient.

· Levels the playing field: A major advantage of the advancements is that it makes the field more accessible. After the overhaul of the value chain it is easier for smaller organizations to attain the point of efficiency without the burden of massive investments.

Snapshots

· Key Players: Uber, Instacart, Grab, Lalamove, Go-Jek, DoorDash

· Market Size: $23.2 Bn

· CAGR: 12.50%

· Average Valuation: $416 Mn

· Average Deal Size: $22 Mn

After Effects of Covid-19 Pandemic on Supply Chain Tech Market

The importance of supply chain management to the economy was already evident to the businesses, but when the pandemic broke and the economy came to a screeching halt it exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere. This contended businesses to do away from the widespread use of just-in-time (JIT) production models that minimize inventory in an attempt to reduce costs, and focus on improving their resilience and reducing their dependence on a single source for their supply of vital products and materials. However, the companies will have to face a few challenges to increase resilience without sacrificing their competitive advantage.

· Addressing risks: The level of sophistication in modern products requires specialized skills to make which is not possible for a single business to possess and they have to rely on external suppliers. This leaves them vulnerable when they depend on a single supplier.

· Diversifying base: To counter the effects of over reliance the best solution would be to diversify your sources so as the vulnerability to same risk decreases.

· Take advantage of new technology: Newer technology allows businesses to lower their costs and increase their flexibility to swiftly respond to unexpected circumstances.

VC Investment Manoeuvre

VC investment in SCT has shown strength through the last quarter of 2020 and first quarter of 2021. Startups managed to raise $12.60 Bn in VC investment across 555 deals in 2020 and $7.70 Bn in VC investment across 186 deals in Q1 2021, this was a 90.6% increase QoQ and 355.1% increase YoY.

The major sections that received investments were downstream logistics companies, warehousing, fulfillment and middle mile and last mile delivery technology. Significant deals of the quarter were GoPuff’s $1.20 Bn Series G, Plus’s $200 Mn late-stage VC deal and Locus Robotics’ $150 Mn Series E.

Supply Chain Tech VC Deals

Source: Pitchbook

There was also a significant rise of 125.1% in the valuation of the startups. What drove these valuations was the surge in demand for e-commerce and food delivery services, which has attracted more venture investment as a result.

Median Supply Chain Tech Pre — Money Valuation

Source: Pitchbook

Emerging Prospects for Growth of the Industry

With the onset of several lockdowns imposed due to the pandemic in several parts of the world, supply chain technology has witnessed a momentum as there has been greater need to optimize logistic requirements. Let us now look at how different opportunities are set to accelerate the industry.

 SCM software

Gartner estimated that by the end of the year 2024, almost 50% of the supply chain organizations will invest in applications that support artificial intelligence and advanced analytics capabilities. This will bring operational efficiencies as it provides a holistic analysis about market size and forecast, trends, growth drivers and challenges. Due to more suppliers realising the importance of software development in SCM, the market for SCM software is projected to grow at a CAGR of 11% during the period 2021–2025.

Trends suggest that majority of the VC investment goes into middle-mile and last-mile applications, while first-mile applications remain underinvested but have the potential to provide significant returns. First-mile platforms — Mercado Labs, see more

Other areas that have the potential to provide substantial returns include supply chain finance services, visibility software, and risk management platforms.

 Warehouse Automation

It is estimated that the global warehouse automation market will grow at a CAGR of about 14% during the forecast period 2020–2026. Post-pandemic, the demand for warehouse automation has transitioned from a ‘want’ to a ‘need’, thereby accelerating the segment’s growth. Incorporation of robotics and autonomous technologies in SCM assist in ensuring uninterrupted warehouse operations and supplies, which is particularly helpful in times of labour shortages. By far, VC investment in warehousing-tech startups for Q1 of 2021 have increased by about 3.4x QOQ 34% YOY. Some key companies working in this segment are AutoStore, Realtime Robotics, Kindred AI, Clutter, Flexe, among others.

 Last Mile Delivery

The market for last-mile delivery softwares is expected to reach $66 Bn by 2026, growing with a CAGR of 8.9% during the forecast period 2021–2026. Most of the consumers have now inclined towards online shopping, and with this transition there has been growing demand for timely delivery. Major companies such as Uber, Door Dash, Gopuff are expanding their services to provide super-fast delivery, in-home delivery, and on-demand B2B delivery. Together these companies have witnessed a cumulative 346% YOY growth in convenience store delivery in 2020. 

Efficiency Gains using SupplyTech

The use of technology in supply chain management makes it a much more efficient process. India has very high indirect logistics costs. It is projected that these costs are about 15–25% of inventory costs, which amounts to $120 Bn to $180 Bn. Reasons for such high indirect costs are inventory mismanagement, inadequate demand forecasting, and obviously lack of technology. SCM technology such as automation, geo-tagging, big data, etc. will help in reducing these costs significantly by ensuring better collaboration, traceability and forecasting. It is estimated that the use of cutting-edge technology for SCM can reduce the operating costs by 30%. As manufacturing in India is expected to rise in the coming years, India is likely to witness a greater demand for supply chain technology.

Firms and Investors alike, are now understanding the importance of technology in SCM. Supply chain tech startups across the world have raised $7.7 Bn in just Q1 of 2021, scaling up the investments by 355% YOY. However, there are many segments in the supply chain technology world that remain less explored by the investors, but have the potential to grow, these include — supply chain finance services, risk management services, and warehousing tech. A careful analysis of the company’s area of operations before putting in your money will drive positive returns your way.

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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.

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.

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