True wealth not lies in ownership of propery but in the right to use it!
Aristole
With the growth of FoFs (Funds of Funds), the world of investing has transcended boundaries, with the ability to invest in countries other than India, including the US and Chinese markets. With the growth in investing in equities, partly driven by the pandemic, the need for asset classes beyond traditional real estate and gold has been on the rise.
Regular income-generating assets in India include stocks, mutual funds, bonds and the rental yield on real estate. These asset classes can generate regular payouts and have varying risks in terms of type and quantum. Along similar lines, investors in India can now invest in another regular yielding that includes lease financing.
For whom?
But before investing in any of these alternate assets, it’s important to understand personal finance as a whole and how these fit into one’s basket. Lease financing provides a regular passive income, generating fixed monthly returns, an alternative to Fixed Deposits and government security bonds, aka G-secs.
What is Lease Financing?
Lease Financing is an alternative arrangement of medium- and long-term loans. In Lease financing, the owner of an asset gives another person the right to use that asset against periodical payments. The asset’s owner is known as the lessor, and the consumer of the asset is called the lessee.
As an example, imagine that you and 5 of your friends (owners/lessors) were to co-invest in bikes that were then leased to a restaurant (users/lessee) to use for delivery in lieu of a monthly rental. This would be an example of a lessor/lessee. It is as simple as that. The question would be why rent and why not buy the bikes outright.
Why not buy them outright?
Companies or businesses do this as they don’t have to spend vast sums of cash on an asset in one go. This allows them to spread their cash payments across a period of time, and as known in businesses, cash is oxygen. From outright buying the asset, leasing allows the company to move these cash investments from the balance sheet to the profit and loss statement.
Besides being able to conserve cash, these rental payments become business expenses and better tax treatment. When they buy outright, the asset would be on the balance sheet as a depreciating asset. That also allows the company to save some taxes, but the cash outflow happens in one go.
Popular Industries
Leasing contracts are relatively common in the west from both raising money and investing points of view. In fact, most businesses, such as airlines, heavy equipment companies, and manufacturing giants, lease their assets rather than own them. All heavy investment-centric businesses can use lease financing to go about their business.
Asset Leasing is an alternative investment option that lets you invest in non-market linked instruments to generate recurring monthly income. So let’s take asset leasing as an investment with the help of a platform called Grip.
What is GRIP?
GRIP is an investment platform that offers curated investment opportunities in lease finance with a low minimum investment amount and fixed returns. Think as low as Rs 10K in one investment and generate reasonable post-tax returns. This asset class was initially available to banks as lessors, big-name industries, and companies as lessees.
Asset leasing by GRIP allows you to co-invest in physical assets like electronics, furniture, bikes and batteries by leasing them to startups or new-age corporations with strong balance sheets or business fundamentals. This is where GRIP differs from the traditional lessors in that they would typically not lease to these entities.
The lease terms are pre-agreed, leading to monthly recurring payments. GRIP has been generating 12% IRR post-tax. That’s better than most traditional investment options like fixed deposits, government bonds, etc. But never the less, the proportional risk is definitely higher. I would recommend starting off small!
Information Transparency
- The payout schedule is available in a transparent fashion.
- The financials are available as well.
- The website is designed quite well from a UI/UX perspective, with easy navigation. By bringing agreements, payments schedules/collections and aggregating all information in a single place, GRIP has played the mediator and made sure the information available is presented transparently. They have done an excellent job in kickstarting lease financing in India.
Investments at a Glance
GRIP has people believing that IRR is 21% on their website, but that’s pre-tax and post-tax. It is 12% post-tax. This drop-in investment is because LLP income is taxed entirely instead of just the returns. Each investment deal is an LLP of its own.
- Risk: Medium
- Returns: Good
- Liquid: No
GRIP‘s popular partners include:
- Furlenco
- Vogo
- Uber
- RentoMojo
- Udaan
- ChargeZone
- Ashok Leyland
For example, Take a look at this
Udaan, a top-rated B2B firm, leases 3Cr and has 333 different investors in this specific asset class. This roughly turns out to be 1L per investor roughly. This is quite a micro-investment tool and augurs well for the future of lease financing in India. More startups and entities should be able to optimise their financials better and allow retailers to participate.
GRIP Logistics
Grip selects investment deals based on three key metrics:
- Financials (balance sheet)
- Corporate profile(company reputation)
- Business performance(key contracts,trends,etc)
Investing Recommendation
The asset class has the following going for it:
- Monthly Payouts: Get paid monthly on a fixed schedule.
- Fixed Returns: Pre-agreed monthly payments for the full lease tenure with no day-to-day volatility like stock markets.
- Diversification: Non-market linked
- Low Friction: Upfront security deposit as well as the ability to recover, re-lease or sell assets to mitigate risk
- Tools: Lots of tools are available for calculations and tax assistance.
While GRIP does its due diligence and sources deals carefully. With most of these being startups with a minimal history and running away, we don’t recommend blind investing. This investment can be started as an experiment, which can then be scaled slowly based on how it goes. We would recommend investing in the risk part of the barbell.
Lease Financing Taxation
All payments you receive are post-tax since the LLP already makes the tax payments; hence, there are no additional tax implications for you.
- As a partner to the investment LLP, you must additionally fill out ITR form 3 when you submit your income tax returns.
- On behalf of the LLP, Grip will file ITR 5 and provide the same to you to make the process transparent and accessible.
Default Risk
All said and done, everything goes out of the window, and the movement there is a default.
- The LLP have the ability to reclaim assets for selling or re-leasing.
- While safeguards are in place, it does not guarantee 100% returns if the leasing partner defaults. In that case, GRIP will take a suitable legal course.
- GRIP will take care of all the processes related to reclaiming assets for selling or re-leasing in case of default.
Investor Logistics
If one still decides to invest and go through the process. There are multiple ongoing deals at any point in time. The process is similar to Kickstarter campaigns. This is the easiest way to participate in lease financing in India currently.
- Once the funding target for a deal is achieved, GRIP will send you the agreement and consent letter for the LLP, which would be the vehicle of investment for the deal.
- Investors will receive returns within 30 days after the 100% funding is completed.
For more details or a consultation on the same, reach out to abhinav@statarb.in