If you are a savvy investor, you would find it difficult to ignore alternative assets now. That is because the global trend of savvy investors of all sizes making substantial allocations towards alternative assets seems to be growing in India as well.
When done right, alternative assets can deliver higher, inflation-beating and non-market linked returns. However, as a new investment option, its risks are less known, which investors should assess before taking the plunge. Before investing you need to understand how it works and whether it suits you or not.
What are alternative investments?
Alternative investment (AI) can be broadly described as any investment into asset classes that do not include stocks, bonds or cash. Examples include P2P lending, revenue-based financing, angel investments in startups and much more.
Like most newer investment products, higher net-worth individuals are early adopters in this segment too and due to increased digitisation of retail investing practices and the trend of fractionalisation, alternates are making their way into portfolios of all sizes.
According to an Anand Rathi report, the overall investments through alternative investment funds is expected to grow at a rate of 25% between 2022 and 2025. This growth will be steered by wealth managers providing alternative investment fund products to high net-worth individuals, insurance firms and family offices. The report specifically highlights that India, rest of Asia and other emerging economies are primed for the next wave of alternatives growth.
The report also suggests that the contribution from high networth individuals, retail investors and wealth managers already account for 5%, or nearly $750 billion of the industry's total AUM. This number will shoot up as regulatory changes and advancements in technology will lower the entry barriers for investors of all sizes.
AI options for Indian investors
Alternatives offer the opportunity to achieve the aim of better risk-adjusted returns when combined with traditional assets. Next, inclusion of alternatives in the portfolio broadens the variety of asset classes, further improving returns for investors.
Here are some examples of fast emerging alternative asset classes in India, investors could explore:
Revenue-based Financing (RBF)
In this alternative investment mechanism, you as the investor provide capital to a company or an organisation. In return you expect returns in the form of a certain percentage of the company's total gross revenues. Revenue-based financing, of late, has emerged as an attractive way of raising capital by the corporates and young startups. For most startups traditional debt is not accessible until the company breaks-even but capital is still needed for growth, this is why RBF is a suitable in these cases. Ecommerce/Direct to Consumer startup brands are popular RBF consumers. You can choose from one of the many online platforms available today that diligence companies seeking RBF on one side and connect them with investors who can invest as little as Rs 50,000 per transaction.
According to a report by Allied Market Research, the revenue-based financing market across the globe accounted for $901.41 million in 2019. This number is projected to rise to $42.34 billion by 2027 with an expected CAGR of 61.8% from 2020 to 2027.
Litigation Financing
Litigation funding, also known as third-party funding (TPF), has emerged as commonplace in countries such as the United Kingdom, the United States and Singapore. The popularity of litigation financing has surged to an extent that TPF as an asset class has gone on to outperform private equity and hedge funds. It refers to a loan given to a company (by investors such as yourself) that is under the insolvency process in an attempt to support them by providing the capital that's needed for them to stay operational.
TPF is relatively rare and not commonly heard of in India. It is a close variant of 'restructuring' done by large operators. New platforms are emerging that create sector-specific Special Purpose Vehicles (SPVs) for litigation financing wherein retail investors can participate in the SPV starting at Rs 10,000. The SPVs then provide interim financing to companies undergoing insolvencies so that they can remain operational. These companies could even be MSMEs.
However, due to various recent legal developments, large conglomerates in the infrastructure and EPC sector are entering into TPF arrangements with investment management companies in an attempt to deal with the problem of stressed assets and ongoing high-value litigations that are known to plague the sector as a whole. A fund is set up for TPF which investors can participate in. However, legally savvy investors are the ones who usually do this. However, this option is suitable only for legally savvy investors.
Peer-to-Peer Lending
Peer-to-Peer (P2P) lending simply refers to a financial instrument that allows any individual investor to access credit directly from other individuals or investors, without the need of an intermediary throughout the process. In formal financial systems, banks or other financial institutions act as the intermediary. P2P lending in India is regulated by the RBI and only RBI approved platforms are allowed to operate. The regulated nature of P2P investments makes them relatively safer to invest in.
You can make P2P investments in ticket sizes starting from just Rs 5,000 up to the RBI imposed limit of Rs 50 lakh. The biggest risk in a lending business is default by the borrowers. To minimise the risks of borrower defaults, lending platforms deploy data science and ground operations to manage the portfolios.
Fractional Real Estate as an Alternative Investment
With the structural change that is being witnessed in the capital market, fractional real estate has the potential and characteristics to benefit in the long run. Fractional real estate in simpler terms, refers to a concept where like-minded investors come together to own a commercial property collectively. Hence, as an investor you go on to become fractional owners or investors with minimum investment requirement of Rs 20,000.
Fractional real estate divides the expensive cost of purchasing a property into several fractions. This allows you to participate and invest in different properties. The fractional ownership market is expected to grow by 16% in the years to come. Further, the industry in India is estimated to be valued at $5 billion in the next five years.
Evaluate the risk and your risk appetite before investing
Given the recent fluctuations in the market across the globe coupled with rising inflation, you are likely to have already felt the need for adding fixed income investments to your portfolio.
Regulators in various countries are extending a helping hand by bringing greater clarity to deepen financial markets and safeguard the interests of the investors at the same time. Post the 1990s, having access to the stock market became the wealth driver for a major chunk of the population in India as well as the world. India stands today on the cusp of a similar yet different opportunity with the next wave of wealth anticipated to be driven by the growing prominence of alternative investments.
While understanding the return on investments, as an investor you should also consider the regulatory aspects of various alternative investments before investing your hard-earned money. While some alternative assets are regulated, implying that regulators oversee the entities offering them, some are not. Most traditional financial assets, on the other hand, are regulated.
Besides, like all investment types, these also come with their own risk-reward profiles which you must understand.
(The author is CEO & Co-founder, IndiaP2P.com.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
