Mumbai: India’s financial regulators are working towards a deeper secondary market for alternate investment funds (AIFs) to help them manage longer fund cycles, said S. Ramann, chairman, Pension Fund Regulatory and Development Authority (PFRDA).
Advocating a perpetual fund structure, Ramann, who has been tasked with bringing about pension fund reforms in the country, said a venture capital and private equity fund should not be for a limited time period, as it affects their ability to support portfolios for the long term and deters them from generating outsized outcomes.
“I don’t believe in funds which run for 8-10 years. I believe funds must run perpetually," Ramann told Mint. “There is no need for a manager to fold up a fund. You are exiting an asset, and you are repaying and distributing capital to the LPs (limited partners) as pre-determined agreements. Why do you need to fold up the fund? LPs are happy to get the gains and the fund managers can approach them to give more money to invest further within the same fund.”
PFRDA has approved reforms allowing National Pension System (NPS) funds to invest in AIFs, potentially unlocking more than ₹1.17 trillion for private equity and venture capital.
The aim is to diversify pension portfolios into unlisted, long-term assets while establishing a framework for pension funds to act as LPs. The regulator has permitted 1% of the total assets under management (AUM) to be invested in AIFs. As of 28 February, the AUM stood at ₹16.46 trillion.
Secondary market for unlisted firms
PE and VC funds are increasingly creating continuation funds in India to help with liquidity for LPs while enabling GPs to remain invested in their trophy assets. Continuation funds allow limited partners to exit while enabling firms to stay invested in high-performing assets beyond the typical fund cycle.
“We are seeing more instances of AIFs going back to their investors to seek longer periods of time for the fund. This has been a demand from the AIF for the last five years, and thankfully, the Sebi (Securities and Exchange Board of India) chairman has agreed to it this time because there is a realization that managers do not have control over the portfolio company's performance," he explained.
Sometimes, the portfolio company needs a longer maturity period, he said. "GPs (general partners) don't want to sell out of it as they make nothing from the investment. Therefore, we are looking at the creation of a secondary market for unlisted companies.”
There is a need for a deeper secondary market in India, Ramann feels. “It's a secondary market for the AIF units to facilitate exits in a totally illiquid market. There are some secondary funds. They will come and ask for a 30% discount. Now, as a public entity, how do I justify a 30% discount?"
"So, the moment you create a market, five other LPs may be interested in that, and then there will be a price discovery mechanism. This has been done to address the justifiable exit route as an investor in the fund.”
Ramann, who previously steered Small Industries Development Bank of India (Sidbi), has been working towards ensuring pension money flows seamlessly into newer asset classes.
He, however, feels the market in India isn’t mature enough to take bolder global bets on the lines of Canadian pension funds.
“We have put together this strategic asset allocation committee, which will hopefully provide us a glide path for the next few years. We are being more domestic-focused in our approach," he said.
"I believe, from the subscriber’s point of view, it's the best decision, because the kind of returns that you're getting in India and the projected returns that are being talked about, probably you're much better off being within the country and avoiding any kind of currency risk, etc. So, I think for the moment, we're looking at what kind of additional asset classes we can open up within the country,” he said.