Debt Alternatives

 

As India moves towards becoming a 5 trillion-dollar economy, investors have much to gain by participating in this big growth decade via equities. But equities are essentially long gestation investments and come with their fair share of volatility. For investors looking at fixed income to park short term funds or wanting higher returns while diversifying from equities, traditional fixed income instruments and mutual funds offer limited options.

On one hand there is  demand for products with higher returns in the fixed income space. On the other hand, is a growing requirement of funds by business owners and individuals for purposes that aren’t traditionally covered by banks or NBFCs. For example, Corporates both in traditional and new age business require high quality and different types of capital when they go through special situations like liquidity crunch, bankruptcy, promotor buy backs etc. Similarly on the retail side, our young consuming population needs quick and easy access to loans   to fund their aspirations as well as unique personal situations such as marriages, medical emergencies etc. Not all of them can be serviced by banks due to their stringent lending norms.

Enter a new breed of NBFCs and Asset management companies that are investing in asset classes that traditional lenders do not want to entertain, while at the same time giving access to investors in high yielding regulated avenues. They are leveraging technology as well as legal frameworks available for recoveries, to bring together lenders and borrowers.

I would like to call this space ‘Debt Alternatives’, as these investment products, like traditional debt instruments   have a fixed return component or some characteristics of debt instruments, but have a higher risk associated in terms of credit risk or execution risk and will require a lot more due diligence. There is a demand for these innovative and flexible products in the debt space from investors, both retail as well as HNIs and institutions.

Here is list of the alternatives that have become very popular in the last few years. Each have a unique structure and risk associated with them. I have only roughly touched upon them in this article.

Broadly Alternatives are available on Retail Platforms and on AIFS. On the retail platforms ticket sizes are as small as Rs.1000. Under AIFs, an investment vehicle for sophisticated and HNI investors, the minimum investment is 1 crore by regulation.

Under Retail Platforms, following are two of the most popular variants 

1.   1) P2P or Peer to Peer: These companies leverage technology to bring together lenders and borrowers. Borrowers could be retail /small ticket consumers taking loans for purchasing white goods or small businesses who need short term capital etc. P2P has now started offering fixed yield products in which the risk remains with lender but the NBFC makes a pool of investments on behalf of the investor, manages risk and in return takes a very high fee. Not all P2P have the same risk management systems and it is important to evaluate the merits of each of these individually. Across P2P the RBI mandates a limit of 10 lakhs for lenders, while with a CA certificate the limit can be enhanced to 50 lakhs.

 

2.      2) Alternative debt platforms : These platforms source and curate debt products from business that require funding but find it difficult to get the same from traditional banking systems. Some of their issues are covered/secured by adequate assets or revenue inflows, and sometimes even rated. Each issue has to be evaluated on merit. These platforms allow investors to participate in leasing assets (office equipment/company vehicles etc) in addition to corporate debt, Invoice discounting, and Real Estate debt. This was erstwhile a highly fragmented space dominated by small time market makers and businessmen and today thanks to technology is available to a lay investor.

 

In the AIF space, Real Estate debt funds, Venture working capital Funding, Special situation funding, and stressed assets are all products seeing a lot of traction. In addition to above, AIF investing in pre InvITs space, Long Short funds, NBFC/microfinance debt, Commodity Arbitrage are also jostling for allocations on the debt side of HNI portfolios. Returns can vary from close to mutual fund debt to near equity returns. Gestation period for these AIF products can also vary from short term, as little as a month, to 10 years. Risks also varies depending on the structure of these products. The space is evolving rapidly and it is interesting to watch the innovation and how regulators are facilitating it  while at the same time protecting Investors. Will share my ideas on these products, in detail, in upcoming blogs.

 

-