India’s Wealthtech market – Investors are onto something! | Episode #37
About high repeat rates, high switching costs and increasing moats
Finally, after more than a year, found the motivation to post again.
Off late, wealth tech is something which I have seeing and doing quite a lot. Along with lending and insurance to some extent, probably wealth is the only standalone area in fintech to make serious money.
With gross margins of ~45-55% across firms, PAT margins of ~30% and India’s affluent rising to newer heights, investors have found something really worth putting money into.
And boy, these business are valued at some amazing multiples.
Let’s take a look at public market valuations first
· Anand Rathi Wealth – Trading at 18x sales, 60x PE on TTM basis
· 360 one Wam – 11x sales, 35x PE
· Nuvama – 6x sales, 43x PE
And the slew of deals that has happened across B2B2C, B2C and high net-worth asset management firms in last one year or so and some of the ongoing conversation only reaffirms that this sector is there to stay. High switching costs, high repeat rates and solid trail income along with need for human touch in some of these business along with high potential to use tech makes this a very interesting play.
How is the Wealthtech industry in India structured?
Broadly, there are 6 broader segments into which Wealthtech companies can be segmented into –
1. Traditional wealth players with RM led sales/acquisition channels – Anand Rathi, 360 One WAM, Nuvama, Waterfield Advisors and new age players like Neo Asset (They recently raised $35mn and are in the process of raising more from well known players.) New age players such as Wealthy, Dezerv (to some extent), Kristal also falls into this space. Traditional mutual fund led players like NJ and Prudent are also part of this.
Conservatively, this 15,000 Cr+ market purely in revenue terms.
2. Brokers – This is probably the largest segment. Zerodha, Upstox, Groww, Wealthy (they have a broking license and active broking piece as well) also falls into this. Probably the most profitable piece among all sub-segments, especially combined with the rage that options trading has become, everyone wants a piece of this business, understandably. Players like Fyers, Aliceblue, mStock are also purely brokers.
This is the largest of the segment, with market size being more than INR 21,000 Cr yearly in terms of revenues. Margins tend to scale highly disproportionate here, with PAT margins going up-to 50%.
3. Investment platforms – These are players which offer access to direct mutual funds (ET Money, Angel One, Zerodha, players which offers access to fixed deposits (Stable Money), alternative products (Jiraaf,among others). Standalone platforms have found it difficult to scale revenues and most have added revenue accretive products such as broking to the range of their offerings.
In terms of transaction volumes, this would be 80,000 cr+ market.
4. Robo Advisors – This is one subsegment where there has been lots of ups and downs. Theoretically, it should fly, but humans need human interactions and assurance when it comes to managing their money. Firms like Goalwise, Kuvera, even Groww, Shoonya by Finvasia ( Their trading fiasco aside) have been able to grow. However, they have not really scaled up. Larger brokers now offer robo-advisory as a feature on their platform. I see the future of robo-advisors as a “feature” by players from other sub-categories rather than standalone firms.
Again, difficult to estimate market size here. Remains small
5. Full stack providers along with banking services – These are mostly traditional banking led platforms such as HDFC Securities, ICICI Securities which provide banking plus trading and demat services.
Market size is pretty high here, to the tune of INR 15,000 Cr+
6. Wealthtech Infra players – Players such as Kfintech, CDSL which provide rails to wealthtech companies. Highly profitable and highly scalable. These firms behave more like SaaS firms than wealth firms in general. One can argue exchanges like NSE and BSE are also part of this classification.
Decent market size of INR 10,000 cr+ with very, very high PAT margins. Operating leverage plays spectacularly well here.
Now that we have seen broader landscape in the industry, it would be interesting to see what’s been happening here.
Recent activity in the space
Think the most exciting development have been the $35mn seed round raise by Neo and by all accounts, the round is set to get bigger. Started by Nitin Jain, Varun Bajpai, Hemant Daga who created the wealth business at Edelweiss (Nuvama), they clocked 70 Cr+ revenues in their first year of revenue along with them being highly profitable. They are set to grow by more than 100% in their second year of operations. Stuff that VCs dream of - High growth, great set of founders playing in a large enough area of their liking!
Another interesting development has been the rise of Wealthy in tech led, RIA led, B2B2C wealth management. This Alpha wave backed fund has cross 1500 cr+ of revenue generating AUM along with launching their own broking product. The founding team of Prashant and Aditya are best in their business and one can assume large outcomes from here in near future. Definitely one to keep a close track.
Stable Money interestingly raised $5mn from Matrix Partners and Lightspeed India for Fixed deposit product. Would be very interesting to see the traction here.
Jiraaf raised $8.7 mn late last year led by Accel partners and Harmony Partners. They are doing some amazing products with alternative investments including corporate bonds, bill discounting and bringing them to the market.
As I write, there are multiple conversations in the market around new models. Would be very interesting to see how this space evolves.
How do I see the Wealthtech market shape up?
Given the dry powders that VCs and PEs are sitting on and with limited opportunities in the FS sector (Wealthtech, Secured Lending, MSME lending), I do see the Wealthtech space raising significant money over the next 12 years.
There are some amazing teams such as Wealthy, Waterfield Advisors, Fello, Dezerv that will go to the market in near term and see good investor interest in my view.
I also see some of the existing players to move into Lending Against Securities and raise money for their NBFC arms for the same. It’s a low hanging fruit that should be picked up.
In broking, I definitely see interest for sub-scale players by PEs and private/multinational banks for M&As. Probably some cross functional M&As by larger brokers (lending maybe?) would be interesting to see as well.
Overall, the space will be busy over the coming few quarters. Especially firms with high repeat rates, high switching costs and trail incomes will see lots of interest. As said earlier.
Hit me if you want to talk more about Wealthtech or fintech in general! I am at abhishek4ster@gmail.com