Alternative investment funds industry doubles in size in a year

Mumbai: India’s alternative investment funds (AIFs), or money collected from high net-worth investors to invest primarily in unlisted securities, more than doubled during the past year—the fastest among all other traditional investment vehicles such as mutual funds and market-linked insurance products.

AIF managers raised capital commitments worth ₹ 20,457.45 crore from affluent Indian investors till the end of December from ₹ 11,186.36 crore in the previous year. Of this money that was committed by investors, asset managers raised funds to the tune of ₹ 7,790.52 crore till December compared with ₹ 2,883.49 crore collected a year earlier.

Local alternative fund managers, including private equity (PE) and venture capital (VC) funds, have followed their overseas counterparts in pouring money into Indian technology and e-commerce start-ups, triggering a boom in early-stage investments. In addition, prospects of a rebound in India’s economic growth have prompted wealthy investors in the country to embrace riskier investments in private equity, real estate and hedge funds in search of higher returns.

“Globally, AIFs represent 10% of an investor’s assets, so that way, India is at a nascent stage,” said Andrew Holland, chief executive officer (investment advisory) at Ambit Investment Advisors Pvt. Ltd, which has launched an AIF in the hedge fund space. “In the next 4-5 years, I feel the AIF industry in India will easily cross the $4-5 billion mark in terms of investments made.”

In April 2012, the capital markets regulator brought all so-called AIFs such as PE funds, VC funds, infrastructure funds and social sector funds under an omnibus regulation with the objective of reducing the investment risk of investors. The regulation classified AIFs under three categories, with the first category including VC funds, small and medium enterprises funds, social venture funds and infrastructure funds, and the second category including PE funds, debt funds and fund of funds. The third category includes hedge funds.

The number of firms that have introduced AIF schemes too has increased. There were 123 AIFs in India as on 28 November, while 18 more are awaiting regulatory approval.

“I feel this industry promises a lot of growth in the coming days, especially from here because the overall economic prospect looks a lot brighter now,” said Sundeep Sikka, CEO of Reliance Capital Asset Management Ltd. “In fact, a lot of sectors, which were earlier doubtful about growing, have now started showing a lot of potential which, in turn, will help the AIF industry to record even better growth in the coming days. So far, only HNIs and corporates were putting in money into AIFs, but in the latest trend, we have started seeing even the overseas investors showing a lot of interest in these funds, even though it requires additional approvals.”

Currently, Reliance Capital manages a realty and infrastructure fund—Reliance Yield Maximiser AIF scheme I—with commitments worth about ₹ 800 crore and funds worth ₹ 400 crore already raised. Sikka hopes to raise capital commitments of about ₹ 2,000 crore by the end of the fiscal year.

Over the past one year, the second and the third categories of AIFs have grown the fastest. The amount of commitments raised in the second category has grown to ₹ 10,302.21 crore from ₹ 4,821.58 crore at the end of December 2013. Similarly, the third category of AIFs has mopped up commitments worth ₹ 2,336.03 crore compared with ₹ 835.87 crore at the end of December 2013, according to Sebi.

Holland of Ambit, which manages Ambit Alpha fund with a corpus of about ₹ 250 crore, feels that category II and III will grow faster than category I because the funds included in category I have been there for a long time, while the other two categories are new and involve a different strategy, which mostly come with an assured positive return irrespective of the volatility in the overall market.

“In fact, the third category offers the investor an opportunity to reap similar gains (that direct equity investments may offer) with one-third of the risks involved in direct equity investments,” Holland said.

A presentation by Reliance AIF Management Co. Ltd last September cited a global survey on institutional investing in 2011 by McKinsey and Co., stating that the assets under alternative investments nearly doubled between 2005 to 2007, from $2.9 trillion to $5.7 trillion, and by 2011-end, the total assets reached a record $6.5 trillion.

“The best part about AIFs is that as compared to all other asset classes, in AIFs, there is a lot of flexibility in the way an AIF can be launched or an investor is allowed to participate. Even with one or two investors, an AIF can be launched,” Sikka added.

Holland said a few small changes in the existing tax rules could give AIF investments a huge fillip. “Currently, AIF investments are taxed at the trust level, irrespective of gains or losses made by the investor. We feel AIF investments should be taxed at the investor level, which will help in better tax planning both by the investor and the AIF trust. This may certainly encourage more entities to launch AIFs and attract more investors, as the investor will be certain when and how much tax he will be charged or exempted from,” Holland said.

A group of AIF asset managers has sent such a proposal to the finance ministry and Holland said the industry expects the government to help. “Also, we feel the regulator should now allow AIFs to launch commodity-based AIFs because there is a huge opportunity lying with investments in global commodities such as oil and metals,” he added.