HNIs wary of AIFs on liquidity concerns, polls

  • The recent headwinds that hit the NBFCs has gone on to impact debt mutual funds, making HNIs cautious
  • The AIF registrations suggest that fund managers expect HNIs to come back soon

Mumbai: Wealthy individuals have turned wary of investing in alternative investment funds (AIFs) due to the uncertainty over the outcome of the general election, and the liquidity concerns in the local debt market, fund managers said.

Markets regulator Securities and Exchange Board of India (Sebi) had introduced AIF regulations in 2012. AIFs invest across various alternative asset classes such as private equity, infrastructure, real estate and credit, as well as long and short strategies in public markets. As of 30 June, 2018, AIFs have cumulatively raised 97,611 crore and have invested 74,892 crore, according to data from Sebi.

“High networth individuals (HNIs) have been driving the growth of the AIF market. A large number of domestic fund managers across asset classes such as PE, VC and others have come to depend on HNIs and family offices for fundraising. However, with the recent headwinds such as liquidity crisis that hit the NBFC sector following defaults by some large groups and which has gone on to impact debt mutual funds has made HNIs more cautious in their allocation to alternative assets, which are more illiquid in nature," said a fund manager who is in the market to raise funds for his private equity focused AIF. He spoke on the condition of anonymity.

The firm has, which had made the first close of its fund, but is behind schedule and at a lower target given the cautious nature of HNIs, he added.

Another fund manager, which is also raising capital, said the general elections have added to the concerns of the investor.

“People are looking at waiting it out till the outcome of the election to make their allocations across various asset classes. Post elections, one should hopefully see interest coming back to AIFs," he said.

To be sure, according to industry experts, specific categories within the AIF universe continue to see strong capital inflows.

“The slowdown started in September post the IL&FS crisis and the crash in mid- and small-caps. So, there was a general risk aversion then. But we have seen two categories doing well. And, one of them is credit AIFs. Given the troubles faced by mutual funds, investors have been looking to invest in funds that can take the credit risk, but are also better equipped to handle that. The second category that has seen interest is absolute return funds and, within that, some specific AIFs like consumer sector-focused funds," said George Mitra, chief executive officer, Avendus Wealth Management, adding that there is no general inflow into AIFs like earlier, and it is very specific.

The number of AIF registrations with Sebi also suggest that fund managers expect interest from HNIs to come back soon. So far this year, 44 AIFs have been registered with the regulator, compared to 116 registered in 2018, data from Sebi website shows.