Fractional Investment in Operating Lease Assets – Does it make sense?
With growing industrialisation, and diversification across the value chain, fixed asset purchase and financing costs have become a key area of disruption. These fixed assets, while providing the core infrastructure for the D2C or B2B businesses, such as 3PL logistics, healthcare diagnostics or last mile delivery, do take away high-cost equity from being used otherwise, thereby adversely impacting potential RoI.
The slow and tedious credit approval process of traditional finance, its inability to appreciate and partner with high growth businesses at early stage, high cost of venture debt for asset finance; even from non-banking or fintech channels, all add on to the woes of emerging new age businesses, that rely on physical assets for growth.
Crowdsourcing and peer to peer investment have been around for a while, but lack of institutional grade diligence and oversight have been a drag on this channel. However, this has now begun to change.
The idea of making convenient, non-ownership, asset light growth models, is not restricted only to Airbnb and Uber but has also expanded into other equipment and technology asset categories.
Prop-Tech, meet Fin-Tech
Fractional ownership of fixed assets, for leasing to emerging and fast growing enterprises backed by early stage private equity, with strong leadership and significant market penetration and, is a very interesting play on the fintech meets proptech ecosystem. Alternate asset ownership and leasing is disrupting the traditional ‘debt for assets’ financial model significantly.
Emergence of organisations like Furlenco, Rentmojo, Rentsher have provided significant alternative to the consumer on asset buy vs lease assessment and adoption, specifically in India. In parallel, Bounce, Vogo, and other mobility solution providers also need significant asset base to increase their D2C reach; all of which provide unique opportunities for retail investors to participate in the growth story, through fractional ownership and leasing of fixed assets to such and other businesses.
Traditional leasing market currently focuses on: consists of:
- Commercial vehicles (mostly trucks and busses),
- Industrial equipment (high-cost construction vehicles, mining equipment’s and energy equipment’s like generators etc.
- Enterprise computing, covering data centre/ command centre equipment etc
- Healthcare- large machines for tertiary care hospitals and diagnostic centres
Fractional ownership and Operational lease models are expanding the reach and contours of asset leasing, enabling opportunities like:
- Drones for disaster management and agriculture ecosystem
- Roof top solar assets for marginalised communities
- 2 and 3 wheeled electric vehicles impacting the last and first mile delivery services, reducing costs and improving sustainability, earnings and job creation
- Industrial equipment in warehouses; universities and research labs
- AV, security and personal computing equipment for early stage startups, schools and communities, enhancing reach of IT, providing security, while enabling growth
Global Leasing Market
The global equipment and asset leasing market is expected to grow from $1.2 Trillion in 2020 to $1. 4 Trillion in 2021; at a CAGR of 14%.
Asia Pacific was the largest region in the global leasing market, accounting for 36% in 2020. North America was the second largest, accounting for 32% of the global market. The leasing market is expected to reach $1.84 Trillion by 2025 at a CAGR of 8%. SMEs segment is likely to dominate the market with a highest CAGR of 13.0% during 2020 – 2027; while Asia-Pacific region would exhibit the highest CAGR of 14.9% during 2020 – 2027.
Covid-19 Impact on Leasing Model
Due to the liquidity crisis across economies, leasing model has proven to be one of the better financing alternatives for SME’s; as it provides convenience with a right to use property, plant and equipment, but without making large capital investments and thereby, remain competitive.
What is an operating lease?
An operating lease is a contract that allows the lessor, as owner, to retain legal ownership of an asset but allows the lessee to enjoy the economic use of the asset for a predetermined period before returning the asset to the lessor. Lease contract may offer a purchase option at a price usually based on expected fair value of the asset; and where allowed as per regulations.
How does it work?
Assets are identified, negotiated for purchase and planned for use, by the user organisation. Once the assets are lined up, the user organisation reaches to a fractional ownership investment advisory or asset manager with a proposition that presupposes certain rental yields. The advisory then does its diligence, and upon finding the proposition meeting its diligence requirements and overall purpose, decides to invest in the assets, and then lease it to the user organisation. The user organisation then makes rental payments and uses the assets as per its requirements.
Benefits of Operating Lease - to Investor and those who take on the lease
- Conserve and generate cash, no high-cost debt on the books, no asset carrying costs for the lessor
- The asset is purchased as per the lessee’s specifications and requirements, where the lessee defines the ‘what, when and how’ of their need
- Risk of obsolescence lies with the lessee and the lessor is protected against premature lease termination
- Lessee can continually buy upgraded asset on lease in alignment with its business requirements and growth
- Even though the asset is not owned in the books of lessee, the lease payments can be taken as business expense for taxation
Why should you invest in operating lease assets?
It’s one of the hottest alternate asset investment options. The yields are highly competitive as against traditional banking and financial instruments, and the channels for investment are becoming truly democratized and accessible to all through technology.
Tech advancements are making your investment oversight highly precise and real time, enabling you to monitor risks, if any, and make decisions faster. Fractional ownership reduces your risk exposure, providing you high rental yields; while institutional grade investment advisory and asset management provides value protection.
So what is Upcide.com providing?
- Low ticket size (starting from INR 50,000/-; on Upcide.com)
- Consistent cash flow – We will share cash flow details for each deal so that you know what you will get in your hand
- More security, as your capital is recovered periodically instead of end of the term
- Work with profitable and high growth organisations, where there is PE funding or growth finance available
- Lease security deposit of up to 3 months of lease payments, and bank guarantees, for additional 12 months of lease payments (unless backed by other instruments to enable claw back)
- Thorough due diligence of lease partners, their business model and growth plans, cash flows, background checks on promoters and key personnel
- Risk assessment, across the asset lifecycle and of obsolescence.
If you are looking for consistent cash flows & higher returns compared to traditional financial and banking instruments, diversified risks and low-ticket size of entry, fractional ownership of assets for operational leases will make a perfect addition to your portfolio.
To know more, Reach us on :Deals@upcide.com