The industry body for venture capital, Indian Venture and Alternate Capital Association (IVCA), will focus on drawing more domestic institutional capital into alternative investment funds (AIFs), even as structural bottlenecks continue to slow participation.
“Pension funds and insurance companies allocate very little to AIFs despite regulatory permission,” said Srini Sriniwasan, the newly appointed chairperson of IVCA and managing director, Kotak Alternate Asset Managers Limited, in an interview with Mint.
While policies allow these institutions to invest in AIFs, execution remains a challenge, he said.
Pension puzzle
One key hurdle is structural misalignment.
For instance, the National Pension System (NPS) requires a daily net asset value (NAV), but AIFs do not provide this. This mismatch makes it difficult for pension money to flow into these funds. Sriniwasan added that institutions may also lack familiarity with AIFs or may have had poor past experiences.
Recently, the NPS was allowed to invest up to 1% of its total assets in AIFs. While pension fund participation was permitted earlier as well, it was not practical to implement.
“If you are an NPS subscriber, you would have to decide which AIF to invest in. It is unclear whether most subscribers have the knowledge to make that decision,” Sriniwasan said.
IVCA will also focus on improving ease of doing business for both domestic and foreign investors, Sriniwasan added.
Angel fund bottleneck
Regulatory changes have also created fresh friction in early-stage investing.
The Securities and Exchange Board of India (Sebi) in September last year made it mandatory for angel funds to raise money only from accredited investors. Accredited investors are considered as investors with high risk-taking ability and need to meet eligibility criteria such as certain net-worth and financial asset thresholds.
“From what I have been hearing, restricting angel fund investments to accredited investors has become a challenge. There are only about 2,000 such investors in India,” Sriniwasan said. “The process to get accredited is also cumbersome and not friction-free, although regulators are working to simplify it.”
In India, CDSL Ventures Ltd (CVL) has been granted recognition by Sebi to act as an accreditation agency for investors. The process of accreditation in India is a cumbersome one. In certain countries, investors only need to give a self-declaration to get accredited. In others, the onus is on fund managers to collect the information to determine whether an individual can be considered an accredited investor.
MF vs AIF
Sriniwasan also pointed to regulatory arbitrage emerging in long-short strategies.
On the long-short strategies now being offered in the mutual fund (MF) space, Sriniwasan said that people are quitting the category III AIF industry and joining the mutual fund industry to implement the same high-risk strategy for retail investors.
Sebi introduced Specialised Investment Funds (SIFs) in February last year, which offer long-short strategies. Requiring a minimum ticket size of ₹10 lakh, they are positioned below the ₹50 lakh minimum for portfolio management services (PMS) and ₹1 crore for AIFs.
Category III AIFs also offer long-short strategies but are tax inefficient under the AIF route. The same strategy under the mutual fund route becomes tax efficient.
Private credit risk
On concerns around private credit risk in India, Sriniwasan struck a measured tone. “Private credit funds in India are closed-ended, so investors cannot withdraw money before the tenure of the fund ends. Moreover, unlike global peers, private credit AIFs cannot borrow from banks, so the systemic risk may not spread to banks.”
Globally, however, risks are surfacing.
Blue Owl Capital, one of the largest private credit firms, recently capped investor withdrawals after seeing a surge in redemption requests. Other funds have faced similar pressure.
These developments have raised concerns about weak lending standards in the private credit market, especially after a series of company failures linked to private credit loans. This has also led to questions about whether risks from private credit could spill over into the banking system.
The AIF industry continues to expand.
The total funds raised by AIFs, including Category I, II and III, have increased 1.5x to ₹6.78 trillion as of December 2025.