By AltG Research on behalf of Taponeel Mukherjee & Poornima Vardhan
They both identified and financialised an asset to create a generation-defining investment opportunity. Macquarie Group recognised the potential of infrastructure, while Bajaj Finance saw the untapped potential of Indian consumer durables. As the world of finance continues to evolve, identifying and financialising emerging asset classes will be a crucial element for success.
As India's GDP accelerates with the “Invest India” theme dominating global headlines, it is becoming increasingly clear that the Indian MSME Private Market is an asset class whose time has come. Global investors, governments, and market participants must notice this emerging asset class, as it represents a significant opportunity for growth and FDI in India. Rolling up MSMEs via Roll-Up platforms and such vehicles will generate substantial risk-adjusted returns, as we detail below.
What Are The Tectonic Shifts In the Indian Investment Landscape?
1. Financial Standardisation via the GST framework and increased data and cash flow visibility:
Implementing the Goods and Services Tax (GST) framework in India has brought about a significant change in the financial standardisation of the country. It has replaced multiple indirect taxes with a single tax, making it easier for businesses to comply with tax regulations.
The GST framework has also led to increased data and cash flow visibility as it requires businesses to maintain detailed records of transactions. This has enabled investors to access accurate financial information about potential investments, reducing the risks associated with investing in India.
2. Data Gap Elimination with "India Stack" with UPI, Aadhar and eKYC:
India Stack is a set of APIs and services allowing businesses to use digital identity, e-signatures, and digital lockers to store and share documents. The India Stack has immensely improved data visibility in India, eliminating the previous data gap.
The introduction of the Unified Payments Interface (UPI) has also made it easier for businesses to transact online, reducing the need for physical currency. This has led to a rise in digital payments, making businesses that were previously outside the investment universe fully investable now.
Introducing Aadhar, a unique identification system, has enabled businesses to perform electronic Know Your Customer (eKYC) verification of customers. This has reduced the time and costs associated with customer onboarding, making it easier for businesses to expand their customer base.
3. Extremely liquid secondary market with significant capital and institutional players in India:
The Indian secondary market for private transactions has become extremely liquid over the years, with significant capital and institutional players investing in the country. The presence of institutional players such as mutual funds, pension funds, and private equity firms has also brought about a more mature investment landscape in India. A liquid secondary market has also made it easier for investors to exit their investments, reducing the risks associated with investing in India.
What Characteristics Make Indian MSMEs An Attractive Investment Destination?
1. Consumer-focused or ancillary to the consumer industry:
Indian MSMEs are often consumer-focused or provide goods and services that are ancillary to the consumer industry. This makes them well-positioned to benefit from the upcoming growth phase in the Indian GDP, projected to potentially reach $50 trillion by 2050.
2. Inelastic demand gives significant pricing power:
Another investment characteristic of Indian MSMEs is that they sell goods and services with inelastic demand. This gives them significant pricing power in their local markets, as consumers are willing to pay more for essential products and services, regardless of economic conditions.
3. Essential goods and services with less exposure to the economic cycle:
MSMEs in India often sell essential goods and services that are far less exposed to the economic cycle. This makes them the economy's lifeblood, providing stability to cash flows and margins during economic uncertainty.
4. Economies of scale via the platform:
MSMEs in India stand to benefit immensely from AltG's Roll-Up+ platform, which provides opportunities for Growth Arbitrage, Capital Structure Arbitrage, Multiple Arbitrage, and Cost Arbitrage.
5. High operating margins:
MSMEs in India often have structurally high margin businesses, which at a platform level can be used to pursue high free cash flow generating opportunities elsewhere. This can lead to sustainable growth and attractive returns for investors.
What Is The Value Proposition Of Indian MSMEs As An Asset Class?
1. Attractive risk-adjusted returns:
Despite their smaller size and often limited financial resources, many MSMEs have grown their businesses and generated profits. This growth potential, coupled with the relative stability of the Indian economy, makes Indian MSMEs an attractive investment option for investors seeking higher returns.
2. Direct exposure to the India growth story:
Investing in Indian MSMEs provides direct exposure to the Indian growth story. As the Indian economy continues to expand and develop, MSMEs will significantly benefit from increased demand for their products and services. This growth potential makes investing in Indian MSMEs an attractive option for investors looking to capitalise on the country's economic development.
3. Low correlation with other asset classes - reduces risk in the investor's portfolio: Indian MSMEs have a low correlation with other asset classes, such as equities, bonds, and real estate. This low correlation reduces the risk of an investor's portfolio and provides diversification benefits.
4. Long-term stable cash flow via the platform structure that is reinvested in the best opportunities to earn a minimum hurdle rate of return:
Investing in Indian MSMEs through a platform structure can provide long-term stable cash flows to investors. This platform structure enables the reinvestment of cash flows into the best opportunities to earn a minimum hurdle rate of return, thereby increasing the potential for long-term returns.
5. Critical services with inelastic demand allowing for inflation costs to be passed through to the consumer, thereby providing investors with an inflation hedge:
Many Indian MSMEs provide critical services with inelastic demand, such as healthcare, software, and basic necessities. These services allow inflation costs to be passed through to consumers, providing investors with an inflation hedge. This makes Indian MSMEs an attractive investment option for investors looking to protect their investments against inflation.
Overall, Indian MSMEs are an asset class whose time has come as the global search for growth and yield heads towards India for both equity and fixed income investors. It's time to put the balance sheet and capital into Indian MSMEs to supercharge India's growth and investment returns.