PE/VC fund managers cheer move to allow pension funds to invest in AIFs
Mumbai: Private equity (PE) and venture capital (VC) fund managers have welcomed the latest move to allow pension funds to invest in alternative investment funds (AIFs) registered with capital markets regulator Securities and Exchange Board of India (Sebi).
The move is expected to increase the sources of funds that alternative investment managers, such as PE and VC managers, can tap and will bring India in line with global norms, where pension funds actively invest in these asset classes.
While pension funds have been allowed to invest in AIFs only now, other domestic institutions such as insurance firms have had the option to invest up to 3% of their corpus in AIFs since 2013.
The Pension Fund Regulatory and Development Authority (PFRDA) move allows pension fund managers to invest up to 2% of the funds in AIFs. However, for the time being, this has been restricted to only those fund managers who invest the private sector corpus under the National Pension System (NPS); also, investment is restricted to category I and II AIFs. Funds that have a positive spillover on the economy and receive some concessions from the government are categorized as category I AIF and those funds where no incentives or concessions are given are classified as category II AIF.
In the almost three-and-a-half years since August 2012 when Sebi announced the AIF norms, category I and II AIFs have managed to raise about Rs.12,865.13 crore (a little over $2 billion), data from Sebi shows.
The PFRDA move is expected to give a boost to the domestic fund-raising environment and reduce dependence on overseas funding, given the huge corpus under management of pension funds under the NPS.
Total assets under management (AUM) under the NPS have crossed Rs.1.1 trillion with more than 11 million subscribers. Of the total corpus, around 89% of the funds are from the government sector and the remaining 11% from the private sector.
“It is good long term move, as the horizon of pension funds and PE/VC funds are both very long-term and well-aligned,” said Gopal Srinivasan, chairman and managing director, TVS Capital Funds, adding that globally over 40% of the investments in PE/VC funds come from pension funds.
In 2015, California Public Employees’ Retirement System, the largest US pension fund with an AUM of $298 billion, had an exposure of $31.1 billion to PE funds, around 10.4% of its total corpus, according to data from PE database Preqin.
The decision also comes at a time when equity markets have turned volatile, affecting returns from equity investments for these funds.
“These treasuries need more flexibility to generate returns and this move will provide added flexibility in volatile times where equity is hard to read. Having more options on the alternative asset side definitely gives the investment managers of pension funds much more flexibility,” said Rahul Khanna, founder and managing partner at Trifecta Capital, a Sebi-registered category II AIF that is raising funds from domestic investors.
One major advantage of the move will be the broadening of the domestic investor pool that alternative investment fund managers can tap. Currently most domestic fund-raising is centered around family offices and high net-worth individuals (HNIs), especially in the case of VC funds.
“If you look at the traditional fund-raising environment in India, the fund managers largely depended on HNIs, family offices and if you look at institutions, very few such as Sidbi are active in this space,” said Anil Joshi, co-founder of VC fund Unicorn India Ventures, adding that a broader pool of domestic money will allow more VCs to come forward and invest in the Indian entrepreneurial ecosystem. Unicorn India Ventures, a Sebi-registered AIF, is currently raising Rs.100 crore from domestic investors.
In the last six months, several domestic VC firms such as Unicorn India Ventures, Endiya Partners, Altius Ventures, Parampara Capital and Venture Catalysts have emerged, which are tapping the domestic capital pool to collectively raise almost Rs.650 crore. Access to pension funds will ease the fund-raising process for these firms.
However, fund managers point out that while the move is a positive development, the government will have to look at the tax aspects to ensure efficiency of the same.
“The budget should bring the balance of tax reforms needed to enable such measures to be executed tax efficiently,” said Srinivasan of TVS Capital.