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Alternative investment funds (AIFs) used by wealthy and sophisticated investors fetched lower returns than the plain vanilla Nifty index in the five years beginning FY14, India’s first AIF industry benchmarks released by Crisil Research showed.

While the Nifty total returns index (TRI) from FY14 till 30 September 2019 stood at 12.8%, the pooled internal rates of return (IRR) for category I and II AIFs in the period were lower at 10.99% and 8.71%, respectively. The only segment which fared better was category III AIFs—counted from 30 June 2013—which fetched 13.93%, against a Nifty TRI of 13.2% in the same period.

Besides, the AIF returns figures do not include the performance fees—‘carry’ in industry parlance—levied by fund managers. Once these are accounted for, their returns would be lower.

“Carry will make a big difference in numbers. It is typically 20% of returns with catch-up above a hurdle. So, for a 15% return, 3% is lost to carry," said Vikas Gupta, CEO of Omniscience Capital. “The performance numbers are a result of excess supply of capital in these venture capital/private markets and not enough demand from the potential high-quality investee companies, which are few in number, for capital. The stories of unicorns like Flipkart or Ola are true, but there are selection and hindsight biases. For every Flipkart, there would be a thousand duds," he added.

Launched after a Securities and Exchange Board of India directive in February, India’s first AIF benchmarks offer insights into these investment vehicles where the minimum investment is 1 crore, limiting their access to those who seek higher returns and can stomach higher risk. While category I funds include venture capital, SME, infrastructure and social venture funds, category II AIFs invest in equity or debt, but cannot borrow to invest. Category III funds are allowed to leverage and short-sell.

The AIF industry has raised a total commitment of 3.85 trillion from 2012 till June 2020, a Crisil statement said. “We have considered IRR for category I and II and NAV per unit for category III. All three are asset-weighted," said Piyush Gupta, director of Crisil funds research.

AIF managers welcomed the data release. “Having information on AIFs in a single place is a good start. It will provide a basis to investors to evaluate AIFs," Nikhil Kamath, co-founder of Zerodha and True Beacon, a category III AIF. “AIFs, which are not performing, will die out once investors can compare this performance with a benchmark," said Nalin Moniz, chief investment officer, alternative equity at Edelweiss Asset Management Ltd.

Two caveats apply. First, the number of AIFs in FY14 was relatively small at 6 and 13, respectively, for category I and II. In comparison, 11 and 49 such schemes were launched in FY18 as the industry matured. Second, AIFs had inflows at various times in a year while the Nifty returns are from the start of FY14.

Some analysts expressed reservations about the broad categorization. “What is important is to further drill down on stages and sectors across vintages, as fund returns will differ by stage," said Soumya Rajan, founder and CEO, Waterfield Advisors.

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