Pledges made in FY19 are more than 40% of sum raised in FY13-18
Fund managers are using the AIF route as it has proved more efficient on the regulatory front
Alternative investment funds (AIFs) got capital commitments worth ₹1.17 trillion (around $17 billion) in fiscal 2019, indicating increasing investor interest in Asia’s third-largest economy, according to data from the Securities and Exchange Board of India (Sebi).
Sebi had introduced the AIF regime in August 2012 to ease capital flows into alternative asset classes such as private equity (PE), venture capital, infrastructure and real estate, private credit, and hedge funds. Investors who participate in such alternative funds are referred to as limited partners (LPs).
While the capital commitments raised in the past financial year is over 40% of what fund managers have raised in all the previous years, industry experts believe the quantum of capital waiting to be deployed in India is significantly higher. AIF data does not capture total capital inflow into alternatives as several foreign investors such as Softbank, Tencent, Alibaba, and global PE funds deploy capital through other routes. The capital flows are being pushed by foreign investors, as, according to industry estimates, around 80% of the capital coming through AIFs is foreign money.
“At ₹2.82 trillion, $40 billion is the cumulative commitment raised by Sebi registered AIFs alone and from this commitment, ₹1.09 trillion has been invested according to the Sebi website. To this, if one factors in the potential investment allocation from global funds, Asia regional funds and large alternative investors such as Alibaba, Naspers, Softbank, Tencent, one is guided towards a substantially larger amount of private capital dry powder, which although not (directly) committed to India, is looking to get deployed in India," said Vivek Soni, partner and national leader, private equity services, EY.
The total amount of private capital ready to be deployed in India should be in excess of $55-60 billion according to EY’s estimates, Soni said.
India’s increased attractiveness as an investment destination among emerging markets is the prime reason for the increased capital flows. India has been one of the top three emerging markets for LPs to invest capital in the last few years, surveys by the Emerging Markets Private Equity Association show.
“All LPs are increasing their emerging market allocation. When you look at emerging markets, after China, the only large economy that is growing fast is India. Long-term sustainable growth is one of the key factors attracting private capital to the country," he said.
The AIF regime has proved to be more efficient on the regulatory front for investors and hence more fund managers are opting to deploy capital through this route.
It is now relatively easy to raise foreign capital now across various strategies. The AIF regime has acted as an alternative to the FPI regime due to a variety of regulatory restrictions made applicable on FPI investments - such as revised RBI debt investment norms restricting group exposures, investment cap in a security issuance, coupled with the issues in the aftermath of the 10th April Sebi circular restricting NRI investments in FPIs.
Also, since treaty benefits are available for foreign investors coupled with the fact that Category I and II AIFs have a tax pass through, the tax regime is conducive, added Chitlangi.
Another advantage that the AIF structure offers investors is that capital flowing through an AIF is not restricted by FDI norms.
“Also, in the AIF regime, foreign capital coming into the country through an AIF does not face FDI restrictions such as sectoral caps, limited choice of instruments etc. provided that the ownership and control of the manager and sponsor of AIF vests with resident Indian citizens," said Chitlangi.
To be sure, while investors have poured in billions in commitments towards India in the last fiscal, consulting firm Bain & Co.’s recently released India Private Equity Report 2019 shows that an increased number of fund managers expect fundraising environment to become more challenging in 2019.
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