Mumbai: A growing penchant for unlisted investments among affluent investors, along with a new breed of entrepreneurs seeking easier access to capital, has led to a near doubling in the number of Alternative Investment Funds (AIFs) registered in India, taking the capital committed to over 11,000 crore in December.

AIFs were introduced by the Securities and Exchange Board of India (Sebi) in May 2012 to create and regulate different investment avenues for wealthy investors and channelize money into capital-starved businesses.

As many as 93 AIFs were registered with Sebi at the end of December, compared with just 42 on 31 March, according to Sebi data. Nine applications for new AIFs are pending.

The total capital commitment across all registered AIFs stood at 11,186.36 crore, with commitments worth 5,528.91 crore under so-called category I, 4,821.58 crore under category II and the rest under category III. To be sure, while the capital commitment has risen to above 11,000 crore, the actual amount raised was much lower at 2,907.03 crore.

Category I AIFs can include venture capital funds, small and medium enterprises funds, social venture funds and infrastructure funds, Sebi’s rules say.

These funds can invest two-thirds of the corpus in unlisted equities or securities of companies in their respective areas. Category II AIFs can invest primarily in unlisted companies in any space or in units of other AIFs. Category III may invest in securities of listed or unlisted companies or derivatives or complex or structured products.

“Investors seem to be preferring unlisted securities over listed ones as in the long run unlisted securities hold out prospects of higher returns. Secondly, we are told that new entrepreneurs who earlier used to refrain from starting certain businesses due to uncertain capital commitments, are now finding it easier to get into their desired businesses with the access to sector-oriented AIFs available," a Sebi official said on condition of anonymity. “Also, several new-age entrepreneurs are themselves coming together to float AIFs with the seed capital readily available."

Funds registered under category I included L&T Infra Investment Partners, Manufacturing Value Addition Fund, India Agriculture Trust, Incube Connect Fund, Sidbi Social Venture Trust, and IFCI Sycamore India Infrastructure Fund. The Sebi data shows that in this category, 4,945.67 crore is committed towards infrastructure funds, while social venture funds had a corpus of 434.36 crore on 31 December.

Category II funds had commitments worth 4,821.58 crore. This category has seen significant interest owing to the flexibility and scope of investments allowed.

“AIFs have given more clarity on regulatory thought and that has helped both fund managers and investors. Now we have clear rules around themes of funds, seed capital etc. and yet the flexibility required to attract investments," said Milind Barve, managing director, HDFC Asset Management Co. Ltd, which is about to launch an AIF called HDFC AMC Real Estate AIF under category II.

AIFs give fund managers the flexibility to invest in unlisted companies and consider investments at different stages of the business life, Barve said. “The uniqueness of AIFs attracts more varieties of investors according to their risk appetites," he said. “In order to encourage entrepreneurship, you need early stage funding and that is where AIFs have a major role to play."

Piramal Investment Opportunities Fund, HBS Raksha Movies Fund, Tata Alternative Investment Fund, Blacksoil Realty Trust, Peninsula Brookfield India Real Estate Fund, India Asset Growth Fund, Edelweiss Stressed and Troubled Assets Revival Fund Trust and DAR MentorCap Film Fund are some of the AIFs in the category II.

Another reason behind the popularity of AIFs is their flexibility in entering and exiting investments, fund managers say. “These funds can return money before the final date of maturity in case the fund has achieved its investment objectives, thereby enhancing the client’s IRR (internal rate of return). This is in contrast to, say, a mutual fund where dividends can be distributed only from profits. Among other things, this is one of the reasons we are witnessing many Asset Management companies applying for AIF licences," said Umang Papneja, chief investment officer, IIFL Wealth Management Ltd.

The ability to invest in unlisted equity or debt in sectors such as real estate has made category II funds quite attractive, Papneja says. “Investors who do not wish to lock in money in unlisted companies for long periods of time (as would be the case in category I funds) may invest in category II funds which further invest in higher yielding fixed income products."

Category III AIFs, which include hedge funds and funds based on complex high-risk and high return products, however, managed to raise commitments of just 835.87 crore on 31 December. Mavenvest Absolute Return Fund, DSP BlackRock Alternative Investment Fund category III, Redart India Trust and Ambit Alpha Fund are some of the category III AIFs at present.

While commitments raised from investors have been the highest in category I AIFs, the actual funds raised and investments made so far in this category have been the lowest. Against a total commitment of 5,529 crore, only 699.48 crore has actually been raised and 203.77 crore deployed for making investments.

To be sure, while funds lock in a capital commitment from investors at the time of inception of a fund, the actual capital is raised at different stages of the fund’s life.

The proportion of actual funds raised and investments made against commitments is much higher for the category II and III AIFs.

In category II, 4,821.58 crore worth of commitments have been secured from investors, out of which 1,647.95 crore has been raised and 1,222.67 crore already deployed. In category III, 835.87 crore worth of commitments have been secured; 559.60 crore already raised and 477.65 crore deployed.

In terms of category III funds, investors have taken a liking towards special thematic funds, said Papneja.

“At IIFL, we have launched a fund that aims to invest in equity shares of listed and large cap companies which are likely to benefit from a recovery in the economy, such as cement companies, banks, etc.," he said.

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