Can this Chennai startup disrupt India’s bond market?

A few days back, a startup named CredAvenue made headlines with a $90 million fundraise, in just its Series A round of funding. The round became the largest Series A equity fundraise by any startup in India.

The company, a debt marketplace, is already valued at $410 million, and the next funding round could propel the Chennai-based startup straight into the unicorn club, i.e. a privately funded company with a valuation of $1 billion or above.

While $90 million is a huge number for a Series A, the company’s term sheet ahead of the funding round was in fact oversubscribed up to $270 million, CredAvenue Founder and CEO Gaurav Kumar told Moneycontrol.

The round saw a list of marquee investors, led by Sequoia Capital and co-led by Lightspeed, TVS Capital Funds, Lightrock, CRED, and Stride Ventures. Investors and people aware of the company’s journey believe that its offerings can be disruptive and will make accessing debt easier.

We try to break down what CredAvenue does and what gave investors the confidence to invest in the startup.

What does CredAvenue do?

CredAvenue’s platform essentially serves as an infrastructure for enterprises and lenders to discover and execute debt transactions. Founded only in 2020 by Gaurav Kumar, the startup already has over 1,500 corporates and 750 lenders on its platforms. It has also facilitated debt transactions of over Rs 65,000 crore since its launch.

Currently, the platform has five offerings. The first is a co-lending platform for banks and Non-Banking Financial Institutions to discover and provide joint loans. Secondly, enterprises looking to seek loans can do so via the platform and it helps manage repayments too. The third, and the one that investors are most bullish about, is a bond marketplace, to help enterprises and lenders access primary and secondary bonds.

Its fourth platform helps secure working capital and cash flow requirements for supply-chain finance. Lastly, its Pools product provides structured finance options like pass-through certificates and securitisations.

What opportunities make the business attractive?

The key attraction of the business is how easy the platform makes it for firms to access the debt market to raise funds, secure loans and for banks and NBFCs to lend and track the loans. This offering is seen as one of a kind by investors and the right fit for a debt-starved country like India.

In 2020, India’s credit-to-Gross Domestic Product (GDP) ratio stood at around 56 percent. But, according to the data from the Bank of International Settlements (BIS), that number is half of the G20 average. With the ratio being much lower than its peers, India has a long way to go in increasing access to credit.

“It has the potential to tap into a larger segment of investors, compared to what has happened historically. Plus, with a platform like this you can add a number of products,” said an industry executive who has closely watched CredAvenue’s journey.

“So, between primary issues, widening the customer base and product range, and the potential of executing secondary transactions in the future, the opportunity is quite significant and adds to the attractiveness of the business model.”

The bond market opportunity

The technology backbone the startup has for the bond market is one of its kind, he added. India’s corporate bond market remains shallow at this point.

According to ratings and research firm CRISIL, corporate bond issuances outstanding could more than double from Rs 33 lakh crore in FY20 to anywhere between Rs 65 to 70 lakh crore by FY25. This will be an increase from 16 percent of GDP in FY20 to 22-24 percent in FY25.

“Debt capital markets have largely been concentrated. Three percent of the rated universe has access to almost 90 percent of the total debt market. So, unless infrastructure like this is built, the market will not have the confidence to access lower-rated bonds, below AAA and AA,” says founder and CEO Kumar.

70 percent of the debt flow to the platform is between bonds rated A and below. But is there a risk in accessing lower-rated securities?

“It is a relevant concern. But once there is a platform with investors on the one hand and issuers on the other, there will be an element of matchmaking. There will be a set of people willing to take the incremental risk for a lower-rated paper,” says the industry executive mentioned earlier.

However, he added, the lack of transparent data on rated securities remains a concern. “Today we suddenly have situations where securities get downgraded from AAA to D overnight. It makes matters worse for people holding these bonds in a low-liquidity scenario. It is a systemic issue,” he said.

Bond market expert K Harihar believes that this is the reason why institutional players dominate sub-AAA-rated papers – they possess the tools to manage the risks that may arise from those papers.

“They have the infrastructure to study the security and the ratings and negotiate returns. But, the presence of risk does not mean you don’t create a pipeline for these papers. One needs to see if there is an appetite from the side of the investors. That will happen if the interest rates are attractive,” he explained.

The $90 million fundraise

Before Series A, CredAvenue had secured a seed funding of $6 to 7 million with backing from its erstwhile promoter Vivriti Capital's investors Creation Investments Capital Management and Lightrock.

Currently, the shares of the company are divided between Creation Investments Capital Management, Lightrock, Sequoia, Lightspeed and TVS Capital Funds, apart from employees and founders.

Kumar had co-founded Vivriti Capital with his former Northern Arc Capital colleague Vineet Sukumar in 2019. Kumar now manages only CredAvenue while Sukumar heads Vivriti. However, the founders continue to be on the boards of both CredAvenue and Vivriti and the companies share common investors Creation Investments Capital Management and Lightrock.

While planning the fundraise, the company set out with the aim of raising $50-60 million, but Kumar revealed that the round was oversubscribed to up to Rs 270 million. What drew investors in?

Gopal Srinivasan, Chairman of TVS Capital Funds, which invested in the round, said, “The company is not following the best practices of the west, but is actually creating the next practices for the world.”

“Plus, Kumar is what we call a part of ‘next gen entrepreneurs’ who are in the age group of 35-40 years and are most likely to succeed. They have the relevant years of experience and have rounded themselves really well,” he added, referring to Kumar’s past role as CEO at financial services platform Northern Arc Capital.

CredAvenue is facilitating around 10,000 loans a day currently, Srinivasan believes this can be doubled in six months, and a run rate of one lakh loans per day can be achieved by the startup in three years’ time.

With hopes of making it to the unicorn club, when will CredAvenue look at raising funds again?

“At this stage we don’t need more capital. We will consider raising funds when the need arises or if we plan any acquisition, rather than focusing on the valuation. Valuation is a function of what we are building,” Kumar concluded.