Fractionalization of Assets – ‘Democratising access to Alternate Investments’
Asia and the emerging economies, especially India, are poised for the next big growth in alternative investment products and are primed for the next wave of alternative growth. As of May 2022, over 900 AIFs had been registered with the Securities and Exchange Board of India (SEBI), with capital commitments increasing at 63 per cent CAGR between 2012 and 2022. Global alternative investments AUM increased from $4.1 trillion in 2010 to $10.7 trillion in 2020 and is anticipated to reach $17.2 trillion by 2025.
Overall investments through AIFs is expected to grow at 25 per cent CAGR between 2022 and 2025, led by wealth managers providing AIF products as alternatives to high net-worth individuals (HNIs), family offices, and insurance firms.
Fractionalization of Assets:
AIFs in India require a minimum investment of ₹1 Cr (with angel funds requiring ₹25 lakhs). Participation in large scale by retail investors remain a distant dream till now. Retail participation in these instruments therefore needs to be facilitated by reducing the minimum investment size requirements through ‘fractionalization’, i.e., by dividing the underlying asset into smaller units. Other areas requiring such fractionalisation for greater retail participation include amongst other products the following,
- Corporate debt
- Commercial real estate funding
- Less liquid and high-risk equity investments, such as in start-ups, and
- Other forms of financing employed by companies such as operating leases, inventory financing, invoice discounting, etc.
Market Size:
TAM(Total Addressable Market)
Total retail wealth in India is estimated to be in excess of ~₹ 450 lakh Cr across financial and physical assets1. The TAM for alternative investment platforms (AUM basis) can be assumed to be 10-20% of this overall wealth, viz. ₹45 to 90 lakh Cr, on an AUM basis
SAM (Serviceable Addressable Market)
As per RBI, aggregate deposits in scheduled commercial banks in India totalled to ₹ 162 lakh Cr, of which ~₹ 142 lakh Cr was time deposits2, and ~₹ 138 lakh Cr was attributed of residents. Indians have a further ~₹ 4 lakh Cr invested in debt mutual funds and ~₹ 1 lakh Cr invested in bonds & debentures.We expect that a portion of this wealth can move to higher yield alternative investments with fractionalisation.
A product such as a commercial real estate investment remains as an investment option for only the top 5% of the Indian population in terms of household wealth. Top 5% of Indians constitute ~50% of the overall household wealth.. Based on this, we expect the serviceable addressable market for alternative investment platforms to be in the range of an additional ₹ 5 to 10 lakh Cr, on an AUM basis.
SOM (Serviceable Obtainable Market)
- Considering the low penetration of alternative investments till date, and the levels of risk associated with some of the more innovative products, it is likely that their penetration may remain low in the near future. Assuming potential penetration growing up to 20% over a 5-year period, the SOM would be the range of ₹ 1 to 2 lakh Cr, on an AUM basis. Assuming average annual take rates of ~2.5%, this translates to ₹ 2,500 to 5,000 Cr, at the revenue level
- Further upside is available through international expansion by targeting NRIs as well as international investors from markets such as the Middle-East or South-East Asia, by offering Shariya-compliant investment products
Benefits of Fractional Investing:
Flexibility: Emphasizing the core principles of simplicity, diversification and liquidity, fractional investment seeks to establish a trust-based financial platform for investors with transparency and customizable options that helps increase the opportunity of the investors.
Accessibility: With fractional investing, which divides this big chunk into small slices, the ticket size decreases, making it more affordable for people across all income brackets. It can also yield short-term returns to retail investors, oncethe market reaches a threshold and reasonable size.
Pre-vetted investment options: Investing in Corporate Debt or real estate funding may involve high risk. Most of the firms engaged in these areas, have or access to an experienced team, and also provide digital governance tools to allow investors to continuously monitor their investment. One practical example which is currently operational is a real estate investment trust (REIT) a company that owns, operates, or finances income-generating real estate.
- REITs generate a steady income stream for investors but offer little in the way of capital appreciation.
- Most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).
- REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.
Diversification: Another way by which the risks are mitigated is through diversification of investments. Most of these asset classes are market-independent providing predictable cash flows and fixed returns despite market volatility.
Regulatory environment: Currently, fractionalized investment products are not subject to any additional regulatory or compliance requirements, if the broader requirements for the product (i.e., bonds, or angel investments) set by the respective regulator (i.e., SEBI or RBI) are being met. Current operations are compliant with the bare minimum regulations applicable (Companies Act, Debt listing requirements, etc)
Fractionalized Alternate Investment platforms in India:
In the last few years, several start-ups have set up operations aiming to fractionalize alternative assets to make them accessible to retail investors. Their aim is to ‘democratize’ access to alternative investments by,
- Providing higher degree of returns than traditional investment options like fixed deposits, gold, and low yield bonds, and
· Reducing exposure to the systematic risks as in the case of equity (direct / mutual funds) investments. The following figure presents a space map of the fractionalized alternative investment platforms active in India as at today
As the figure shows, the activity in this space has been divided among fixed income products and fractional real estate investments, with Property Share Capital (“PropShare”) being the earliest entrant. We note that this is similar to the global market scenario, where we have seen numerous start-ups offer options to invest in fractional commercial and residential real estate. Globally, several such firms have established themselves with large AUMs and have been backed by marquee investors. for example:
- Cadre is a US-based platform that allows investors to invest in real estate projects and has an AUM of ~US$3.5 billion, and has received investments by General Catalyst, A16Z and Goldman Sachs.
- Moonfare, a German online platform that lets wealthy and qualified individuals invest in a portfolio of private equity funds through a pooled feeder account, raised US$ 125 million in its Series C, from Insight Partners in Nov’21.
- Roofstock, a US-based platform that allows investors to purchase residential assets for rental income and also offers fractional investments through a portfolio management solution. Roofstock raised its Series E, led by Softbank and valuing the firm at USD 1.9 billion post-money in March 2022.
In the following table, we compare the key metrics for some of these platforms:
Company Primary Products Founded Post-money Valuation (₹ Cr) Total funds raised (₹ Cr) Investors
Fixed income Grip Leases Jul-20 90 (Pre-Series B, Jan’22) 35 Anicut, Endiya Partners, Venture Highway Wint Covered bonds Jan-20 150 (Seed, Nov’21) 89 3one4 Capital, Rainmatter (Zerodha), Better Capital KredX Invoice discounting 2015 1,110 (Series B, Nov’19) 188 Tiger Global, Sequoia, Prime Venture Partners
Real estate Strata Office spaces and warehouses 2019 137 (Series A, Jul’21) 56 Elevation, Kotak, Mayfield, Sabre Capital PropShare 2014 1,200[1] (Series B, Apr’22) 18 Lightspeed, Beenext, Pravega hBits 2018 Not known 5 Shree Naman Group, Nebbiolo Solutions
Note: [1] valuation ask for Series B basis term sheet received by the Company
- Grip is a fractional alternative investment platform that offers retail investors options to invest in alternative assets. Its product portfolio currently covers fixed income products (movable property leased to start-ups, inventory financing, etc) as well as commercial real estate.
- Debt investment platforms such as Wint offer retail investors the option of investing in covered bonds, NCDs and MLDs issued by financial services companies with cheque sizes as low as ₹ 10,000 (and in some cases even lower). This effectively fractionalizes debt instruments as typically investments have required a minimum cheque size of ₹10 lakh.
- KredX was the first player to offer retail investors the option to invest in short-term corporate loans, in the form of invoice discounting. The KredX platform is available to individual retail investors as well as institutions.