In this article, Nikhil Aggarwal introduces his company GRIP Invest and how it helps retail investors with lease financing services.
Here’s what we cover in the interview:
- Q: Why do retail investors need GRIP Invest? What’s the situation that they were facing before GRIP Invest?
- Q: As you said, the stock market is volatile, and savings accounts are negative in a way when you look at inflation, but we haven’t talked about gold. What about it?
- Q: What does GRIP Invest allow people to do? What is GRIP Invest allowing retail investors to do?
- Q: Do you have a physical asset that reduces the risk as well?
- Q: Let’s talk about some examples where people have invested and how that worked?
- Q: What are the diligence and criteria you go through to make sure that companies are included in your available participation for your platform?
- Q: If there are five companies available, how could that retail investor go through and say, I prefer this one versus that?
- Q: What does the term MIS stand for?
- Q: Do you provide scores, or how is that memorized for the retail investors?
- Q: From your perspective, why couldn’t retail investors do this before GRIP? What was preventing them?
- Q: Could you share examples of investments that have been made and the range of returns?
- Q: Can you just explain what is IRR?
- Q: So that’s one of the main things that is driving your growth?
- Q: So if a brand like Uber gets a profit by 10%, then your investment could be part of that extra one percent growth. Because when you were funding the fleet of cars, that let them grow that extra 1%!
- Q: You were doing credit risk scoring, so you have a deep understanding of this particular space of lending and credit risk as you worked at HSBC and JP Morgan. Is it correct?
- Q: If a business has a financial problem, what are the mechanisms that GRIP has in place to deal with reducing risk in those cases?
- Q: People who are living abroad using GRIP. Why is that a different experience for the parents and for the person?
- Q: How hard is it for somebody to join your platform and get involved with their first investment?
- Q: Is it only for people that have citizenship in India, or can somebody from another country also participate?
Q: Why do retail investors need GRIP Invest? What’s the situation that they were facing before GRIP Invest?
Sure, I will give you two to three data points to validate why we got into this business. I think, first of all, if you just look at how the wealth in India is deployed today and what investment options there are, many people have different perceptions of India.
In terms of the state of the economy, in terms of the wealth in the country, there are enough reports now suggesting that the top 300 million Indians, about 30% of the population, have 5 trillion dollars in wealth.
So India is often called a country of two different countries; one who lives in rural India and the other that lives in urban India.
When we talk about the 30% of the population that is middle income and above, there’s a significant amount of wealth that is held among these people, which is 99.5% of it. So almost 100% of it is invested in two or three asset classes.
The first being fixed deposits or bank deposits, the second being stock markets, and the third being gold.
All of them are incredibly traditional forms of storing wealth and allowing some appreciation in the money. These asset classes have worked in the past because India has traditionally been a high-interest rate economy where the banks have given a fairly good return on the deposits which are stored with them. What that has meant for investors is that the money is very safe.
You know, putting it with a bank at the same time, they are earning a rate which is higher than the inflation rate and hence making real returns. The stock market as well has done incredibly well since India liberalized the economy in the 1990s, and hence people have seen wealth creation. However, in recent times, a couple of things have changed.
One is that the bank deposit rates have become low. Today, if you put money in a bank deposit, you are losing money versus the inflation rate. Hence, there is no incentive to put money in the bank apart from a preservation and safety perspective.
On the stock market side, what’s happening in the rest of the world is that we are seeing very high volatility. The stock markets continue to deliver great returns but with volatility. Most of our generation before us, probably the 1960s 1970s generation, saw periods of economic boom separated by distress or stress in the economy after significant periods.
But, if you look at the generation today in the last decade, we have seen maybe two or three different cycles already play out, and hence the volatility that people are facing in terms of making returns is significantly higher. Therefore, the traditional asset classes that people have are becoming challenging.
On the other hand, the interesting thing that we have started observing is that the generation of our parents, the 1960s-1970s generation made a tremendous amount of wealth because of real estate and because companies were listed very early in their life cycle.
But, companies today across the world are staying private longer than before. Like Facebook went public at a 100 billion dollar evaluation.
Companies in India are going public at a 10 billion valuation, which means that the opportunity to make returns in the early part of a company’s life cycle is no longer available to public market investors.
Q: As you said, the stock market is volatile, and savings accounts are negative in a way when you look at inflation, but we haven’t talked about gold. What about it?
I think the challenge with gold is that gold is seen predominantly. In India, it is a store of money; people use it because they have a traditional association with gold as being very safe, but interestingly gold is also a very volatile investment.
Oftentimes it is counter-cyclical to growth trends. So in a market where things are the stock market is doing well, gold tends to go in the other direction.
There is a perception that the value of gold cannot go down. There is a perception, but if you look at the actual data, that’s not the case. Hence, from a new economy and new investor perspective, growth is no longer an exciting asset class.
The association of safety for investors is no longer coming from gold, and hence we see less and less of the new generation adopt gold as an investment opportunity.
Q: What does GRIP Invest allow people to do? What is GRIP Invest allowing retail investors to do?
If you were to find a solution for this problem (discussed earlier), you want to allow individuals to participate in the opportunity with a private company and not a public market company in a way that you generate high yield returns or higher returns than what the inflation rate is.
But, at the same time, make it available at a very small transaction size because while there are five trillion dollars in total wealth, the ability for each person to participate may be smaller, especially every month, then you have to solve for three things.
- Access to private companies
- Small transaction size
- A higher rate of return
What GRIP Invest does, or what we did 18 months back, was to create a product called “Lease Financing.” I will explain this with a very simple example.
As an example, a lot of us have used Uber, and it’s something that we all know of. What if you could buy a car and put it on uber’s platform and earn monthly returns from the usage of that car.
Uber or Uber’s driver platform pays you monthly returns for the use of the car, which is, in a word, lease financing. It’s an incredibly popular financing concept especially used in the airplane industry and the real estate industry, but it can also be used for smaller asset classes like vehicles.
GRIP Invest created an investment product out of this, allowing people to put as little as three hundred dollars to work on a particular investment option.
It allows owning fractional units of a physical asset like a car, furniture, electronics, or machines and leasing it out to companies in return for a monthly lease income over a defined period.
Q: Do you have a physical asset that reduces the risk as well?
That’s right. There are three fundamental factors that people were looking for, and then GRIP Invest enabled them. But, as we went down the journey, we realized there are certain elements of the investment product that are more attractive to investors, and we designed our product according to them.
- One is the comfort, as you mentioned, of owning something real or holding something, and that’s where the name grip comes from. It’s taking a grip of a physical asset that gives you security in the event of a credit default.
- The second is monthly returns. The fact that you get some returns every month is a great way of generating passive income. At the same time, it reduces your risk because your capital is coming back to you every month.
- The third factor is that people are afraid of an end-of-life event. Something like an IPO or an acquisition to liquidate investments because you don’t know whether that will happen or not in the timeline that you want in case of a lease transaction. You get partially liquidated every month, and that also creates a huge amount of comfort for investors.
I think the combination of these factors has resulted in the kind of response we have received in terms of the uptake of the product and the month-on-month growth that we are seeing.
Q: Let’s talk about some examples where people have invested and how that worked?
Let’s start with the example about Uber because I think that’s relatable for a lot of people across the world that listen to that tune into the summit. In India, Uber has a very large fleet partner called Everest fleet.
So instead of working with individual drivers uber, India has a fleet partner, and what GRIP Invest does is provide an opportunity to our users to purchase Maruti Suzuki cars which are the dominant OEM in India, and lease these cars to Everest, which then operates it dedicatedly on uber’s platform every month.
These investors receive a lease rent against these cars. In the last 12 months that we’ve been associated with Everest, we have deployed almost 100 cars on the platform, which are now running with uber. So that’s one example.
Another example is that you mentioned Lanco as a name. I think it’s a fascinating company. It allows people to rent furniture for their homes or offices with very short durations, like 30 days to 45 days, depending on how they want it completely on subscription.
Now Lanco also requires furniture on rent to allow these micro lease transactions to happen. What users on GRIP can do is invest in purchasing furniture. This can be so far as. This can be white goods like a refrigerator and then lease it to Lenco, which in turn provides it on a range to its end users.
In none of the cases are our users taking the risk of the ultimate use of the product? There’s no risk of the person taking the cab ride on uber or using the furniture from Lenco. The risk is actually on the company, and hence the risk is distributed even further.
Because m the end-user may default on a payment or a cab payment, but that does not impact our user. So that’s an additional level of protection that gets created.
Q: What are the diligence and criteria you go through to make sure that companies are included in your available participation for your platform?
We have seven or eight criteria that are yes or no decisions, and then we have a bunch of criteria that we want to make sure we have information on that is evaluated for the benefit of this call. I will talk about the two to three top criteria for us.
- First, we conduct very detailed financial doodles in the company looking at the last three or five last years of financials and 18 months of Mis, and the most important question for us is the ability of the company to service the cash flow for the lease transaction.
We look at a forward projection over the lease term. The company’s profitability and cash burn project those numbers that are the first criteria.
2. The second is corporate governance and which is a combination of the quality of the promoters or founders of the business as well as the quality of the investor in the business.
3. One of the yes-no criteria for us is whether an institutional investor is sitting on the board of the company. I think that gives us a lot of comforts.
If it does not exist, we do not lease to that company because we don’t get bored, but we want to make sure that there is a professional sitting on the board. At the same time, the founder of the company is someone with a high standard of corporate governance.
The one other metric I would like to add from a diligence perspective is actually on the asset. We have talked about the company, but the third most important diligence, both quantitative and qualitative, is on the asset that we’re leasing.
Because that’s the collateral, one key criterion for us is to only lease assets that are core to the company. You want to lease cabs to Uber; you don’t want to lease laptops to uber, right. It’s not a core asset for the company.
A revenue-generating core asset is more likely to be met payments on is more likely to be respected as an asset and hence be more safeguarded. At the same time, we want to make sure that the asset is procured from an OEM or a vendor such that it has a good long life and will last the term of the lease. So I think this is the third and final criteria that we apply for diligence.
Q: If there are five companies available, how could that retail investor go through and say, I prefer this one versus that?
We do create a curated list of companies on our platform based on our diligence, and I think that’s important for us to do as we think about the investment behavior. As an investor, you see a summary of our findings.
It’s a simplified, non-technical summary for an investor to evaluate which of those five options they would like to invest in.
At the same time, there are all types of investors. Some savvy investors would like to look at the annual reports, look at an MIS, and on request, we’re also happy to provide that information to that particular investor because we want to make sure that you are incredibly comfortable, you have the information that you want before making a decision.
Q: What does the term MIS stand for?
That stands for a management information system. It’s a report that the management is doing typically every month. It can often be on a different period, but it captures the key elements, both financial and operating, that the company looks at as they think about their business.
Some of them are in the US and other parts. There is a balance sheet, a cash flow statement, income profit and loss, or income statement, and I think the MIS covers most of that.
It covers most of that, plus it also covers the growth in users. How many users churned out, so it covers a lot of operating metrics which are also helpful for us to evaluate a business.
Q: Do you provide scores, or how is that memorized for the retail investors?
It isn’t. Today, we don’t provide scores, but we are in the next phase, and hopefully, when we speak next, you will see a scoring system come in place. What we are experimenting with is getting a third-party credit rating done for the opportunities on our platform.
Ultimately, this is a fixed income opportunity, and can we create a score? Can we create a credit rating for it?. So we are working on both. My sense is in the next quarter, by March 22, we’ll have both in some form or shape at least piloted on our platform.
Q: From your perspective, why couldn’t retail investors do this before GRIP? What was preventing them?
I think I will break it into two factors. The first one is accessing; if you are a company that is looking to raise the capital, you are most likely to go to the person who can write the largest check simply.
It’s less of an effort to go to one person rather than a thousand people, and hence companies used to raise the same capital by going to large private equity investors, venture capitalist families, and offices.
They never thought of making an effort to reach out to the small retail investor, and hence, access to these opportunities was limited.
The number two was education; how do you disseminate information such that people can make the decision that we just spoke about. How do they have access to the information? I think technology has been a great equalizer in so many ways, and so the same is true for investments.
I see this change happening across the world where the same investment opportunities that were typically restricted to the large investors are now being made available to the small investor on account of technology being able to distribute it at a very small cost.
We can ensure that everyone receives access to this opportunity, and there’s no difference in cost between one person versus the other. At the same time, we can also make sure that the quality of information you receive is authentic, accurate, and sufficient for you to invest.
Banks, at least in India, are not yet comfortable looking at startups for providing traditional low-cost financing. Because business models are still getting discovered, you’re still loss-making, etc., or require you to provide significant collateral against a loan. So the traditional options are available but expensive or constrained.
What GRIP is providing them is a non-dilutive, market competitive, fast access to capital for a very specific utility that is linked to revenue generation. We are not the right form of capital if you’re just starting your business, but if you’ve proven product-market fit and you’re looking to scale your business, that’s where we can come in without any of those conditions.
There is no additional collateral, there is no equity, and the rates are competitive to what you would get from equivalent institutional financing.
Q: Could you share examples of investments that have been made and the range of returns?
Let me calibrate the returns to be relative because in the absolute terms depending on which geography people are logging in to the summit, it will seem completely out of order. But in India, it’s different.
The way we think about it is the returns are about three to four times higher than what a bank deposit rate gives you. In India, the bank deposit rate gives you a five percent return, and hence the returns on GRIP in the Indian context are about 20% which is four times the returns on a bank deposit.
That’s how I think the best position it, as we’ve discussed before, these returns come to you every month, and hence what we quote, is a term called the IRR, which values time, the value of money for returns, and are quoted at 20 IRR on our platform.
Q: Can you just explain what is IRR?
It’s the internal rate of return. It means that a dollar today is more valuable than a dollar a month later (time value of money), and it calculates the importance of the timing of returns which makes sense because our returns come every month.
So the IRR of the opportunities on GRIP on a pre-tax basis is about 20, which is four times higher than what a bank deposit rate in India is.
Q: So that’s one of the main things that is driving your growth?
It’s not; it’s everything else we spoke about. We did a consumer survey, and you’ll find this interesting on what it is that gets people to participate in GRIP.
But how do you participate as an investor, and that association is very important to people? The fourth reason is the high returns, and the fifth reason is being able to have an asset back security acid back flattering.
Q: So if a brand like Uber gets a profit by 10%, then your investment could be part of that extra one percent growth. Because when you were funding the fleet of cars, that let them grow that extra 1%!
In the last 18 months, I leased assets to about 70 different companies in India, and I would say 90% of them have gone on to raise future rounds of equity capital at much higher valuations.
In almost all cases, the founders of those companies have come back to us and said that we would not have seen this growth had it not been for leasing assets from GRIP because we would have required so much more capital, and that would have impacted our pace.
It would have reduced our shareholding, but GRIP’s capital has enabled our growth far ahead of what we expected. So those stories have played out.
At the same time, what you said about investors is correct. An investor today, if he invests in an electric vehicle, is contributing not only to the economy in terms of enabling logistics or transportation but is playing a role in reducing our carbon-carbon emissions, and I think people appreciate that.
At the same time, diversification returns all the good things, but those two points at an emotional level are incredibly important to our investors.
Q: You were doing credit risk scoring, so you have a deep understanding of this particular space of lending and credit risk as you worked at HSBC and JP Morgan. Is it correct?
That’s correct. I used to work at HSBC and Morgan Stanley. I would say that while I have the experience of looking at companies, both retail credit and HSBC, and then at Morgan Stanley evaluating companies from a corporate finance perspective.
I think that we have many more qualified individuals now at GRIP who have spent, you know, decades looking at credit underwriting, and we have the benefit of that team to look at that process while, as you know, we’ve created an investment committee that sort of is responsible for the ultimate yes-no decisions.
Q: If a business has a financial problem, what are the mechanisms that GRIP has in place to deal with reducing risk in those cases?
We have already talked about one, which is the fact that you get monthly returns because, through monthly returns, 40 to 50% of your capital is back in 12 months. If you have done even a half-decent job of diligence, you can take the view that the next 12 months are going to go as planned.
Save, leave, aside from situations like a corvette, etc., which can really impact and are difficult to predict. I think the second is really we take a security deposit, so 10% of the lease amount is taken as a security deposit which acts as an immediate buffer to any kind of delay.
The last is the ability to recover the underlying asset and then redeploy it or sell it, and both are viable options on the redeployment side. As I mentioned, we have 70 partners, which means that in a lot of situations, we would be able to redeploy the asset within our ecosystem and not have to go outside to find someone else.
On the sale part, there are opportunities to sell the asset either back to the manufacturer. So in certain cases, we have a buyback arrangement with the manufacturer, or we have identified about 50 partners that may be interested in liquidating the assets and selling them within their ecosystem. So that’s how we mitigate the risk.
To be honest, we’ve never had a situation we’ve had to use this system. We’ve been fortunate that we still have returned about 25% of the capital to investors that have already been returned in the form of monthly payments with no default.
We have done some trials on the system, and we’ve done some fire drills, but we’ve never had a chance to put this system to work.
Q: People who are living abroad using GRIP. Why is that a different experience for the parents and for the person?
This is one of those things that you don’t predict and you don’t expect, but it just surprises you. So positively in the business, just to give some context, India actually has one of the largest non-resident citizens who are based outside the country, earning very well and then transmitting money to their parents or family based in India.
What we have seen happen is a lot of Indians now. A lot of NRIs or non-resident Indians make an investment on the platform but redirect those returns to their parents. When we spoke to a few of them, the feedback that we received was that sending money to the parents seems like giving support, but when they make returns on investment, it seems like income to them.
So the emotional or the psychological differentiation between the same amount of money is very, very different from the eyes of the parents and the relatives, and hence a lot of our users are actually using the product as a way to create this.
Q: How hard is it for somebody to join your platform and get involved with their first investment?
We have tried to make it as easy as possible, and I think we’re trying to do much more. The idea is to make it as easy as buying a stock. Buying stock has become a very easy experience, and we want to make it similar to that giving you all the wells and all the benefits of making a stock type of investment liquidity able to sell it whenever you want, etc.
So we’ve made it as simple as possible. I think we have received very positive feedback about the way the platform is structured, but there’s still a lot more work to be done.
Q: Is it only for people that have citizenship in India, or can somebody from another country also participate?
Today, it’s only limited to citizens of India, not because that’s our intention but simply because of certain constraints on the movement of capital that require certain additional permissions that we don’t have today.
We do hope at some point in time to be able to enable it both ways where we allow Indians to participate in investment options outside the country and at the same time allow non-Indian citizens to participate in investment options in India, but that isn’t the case today.