AIF industry grows 7 times in 5 years as HNIs scout for diversification

Indian AIF industry (alternative investment funds) is standing at Rs 6.4 lakh crore commitments raised as on 31st March 2022, an incredible 7 times growth in the past 5 years.

AIFs are privately pooled funds investing into listed and unlisted asset-classes structured as early-stage start-up funds, late-stage Pre-IPO funds, infrastructure funds, real-estate funds, special credit funds investing in performing or distressed credit, long-only funds, hedge funds and many more as per Sebi’s category I, II & III classification. Minimum investment ticket in AIF is Rs 1 crore (Angel Funds it is Rs.25 Lakhs).

Category – II is the biggest of all, constituting almost 80 per cent. This category comprises private equity funds, distressed funds and real estate funds.

A whopping Rs 3.27 lakh crore of commitment raised is waiting to be called for as per the drawdown structure of various funds.

AIFs have caught the fancy of HNI/UHNI investors looking for diversification through alternatives to maximize risk-adjusted returns by participating in private markets via private equity and debt.

AIF route gives them access to ideas that are otherwise unavailable. A high degree of customisation and flexibility to structure the fund are the biggest pull factors.

The biggest problem private markets face is liquidity. Exits in unlisted spaces can take a lot of time. But the Indian start-up ecosystem is witnessing large exits through buyouts and IPOs.

Notable among them are Walmart’s buyout of Flipkart, Tata’s buying of Big-basket, Zomato, Nykaa, Paytm, and many others giving exit to early investors through IPO.

Some outcomes are positive, and some are negative but it’s a good sign of a maturing market.

Some category - II real-estate funds in the past couldn’t return money to the investors at the end of the fund’s tenure, but with the real-estate sector expected to turn around, these funds should be able to fulfill their commitments.

Category - III long-only thematic funds and long-short hedge funds are also gaining a lot of traction due to structuring flexibility and the potential to offer uncorrelated returns.

Taxation of AIFs is another important aspect that investors should be mindful of.

Category - I & II have a pass-through status, which means tax will be levied at the investor level. Whereas, category - III AIFs don’t have pass-through status, so tax is at the fund level. There is an increased level of tax compliance required while investing in AIFs.

AIF investing is growing fast due to the potential to give higher risk-adjusted returns through sophisticated strategies, diversification, and structural flexibility.

It is suitable for sophisticated investors with a high-risk appetite and understanding of asset classes.

(The author is Director – Private Wealth & Product Strategy at Monarch Networth Capital)