Fixed-income products with equity-like returns
Leasing is a simple contractual arrangement calling for the lessee (user) to pay the lessor (owner) regular payments in exchange for the use of an asset over an agreed period of time. Buildings, vehicles, and equipment are among the most common assets that are leased.
Benefits to Investor
• Opportunity to earn a high fixed return for a specified period of time
• Leasing adds to portfolio diversification by giving a chance to finance different asset classes
• Easy way to provide exposure to different asset classes such as real estate, vehicles, construction equipment, medical equipment, E-battery infrastructure, furniture/fixtures, laptops, etc.,
• Mitigating the risk investors face by parking all their money in single or fewer investments
• Unlike equity / mutual funds, investing via lease isn’t controlled by market sentiment
• If invested through the right medium, leasing as an investment can give 30-50% higher returns than other available fixed-income instruments
• Allows small ticket size investments
• Secured funding backed by an asset/collateral
Benefits to Lessee (Leasing Partner / Business)
• Helps them to scale the business rapidly by following nimble asset-light model
• Flexibility to own the asset at the end of the lease period at a cheaper rate
• Efficient capital allocation by the company to core business by reducing CAPEX
• Reserves the cash and borrowing power for operating expenses and other more intangible costs of doing business
• Lease payments can be structured to match budgetary or cash flow requirements
Role of altGraaf
• Choosing the right leasing partner by conducting due diligence of the leasing partner, management, and financial performance
• Negotiating contract terms with the leasing partner
• Tracking and monitoring of the asset on a regular basis
• Monitoring & verification of the asset/ leasing partner’s office/ and deployment site
• Ensure timely payment to the investors
• Compliance, reporting & management of the day-to-day operations of the LLP on behalf of the investors
Investment Opportunity
Opportunity to purchase an asset and rent it out to a leasing partner for regular cash flows.
Structure of the Transaction
For each investment to purchase and lease an asset, a Specific Purpose Vehicle (SPV) in the form of a Limited Liability Partnership is created in which investors contribute their funds. SPV will purchase & own assets designated to be leased to a lessee. LLP will receive monthly rentals from Lessee which in turn shall be distributed to the investors. An investor will become a Partner of this LLP and represent his investment. His partnership stake in the LLP will represent the amount of investment made by him.
Sample Terms of a Lease Transaction
| Structure | Participation as a partner in an LLP which would own assets to be leased out |
| Issue Size | INR 10 – 15 Crs |
| Lease Rental | ~3% of capital invested each month + a bullet of 20% capital at the end of the tenor |
| Security Deposit | 5% to be given by Lessee |
| Tenor | 36 months |
| Residual Value | 20% of asset value |
| XIRR (Pre tax) | 17%- 25% |
| XIRR (Post -tax) | 11%-15% |
Key Risks & Mitigants in Leasing Transaction
| Bankruptcy of Lessee | • We carefully select our leasing partner by detailed due diligence. Once we are sure that the business macros are strong, we engage with the partner • The asset being leased should be such that it can be re-leased easily after possession. There should be a secondary market for the buy/sell of the asset. |
| Possession Risk of the asset in case of default | • We select such assets which can be registered & are traceable |
| Business Risk: Asset Utilization remains lower than projections | • We look at the unit economics of the asset and evaluate the demand-supply |
| Residual value risk | • This is mitigated to a large extent by keeping the salvage value as low as possible |
| Delay in rentals due to force majeure event like Covid | • The tenor of the deal might be extended for a small and limited amount of time with additional payment from the Lessee to maintain a minimum agreed IRR |
| Theft / Breakdown / Maintenance of the asset | • Complete compensation in case of loss of the assets will be the responsibility of the lessee. Further, they will also be responsible for all repairs (whether routine or resulting from any damage or accident and maintenance costs of the respective assets) |
Explore our high-yield fixed-income investment opportunities like leasing and a host of others, here.
