AIF Demand Signals Focus On Wealth Creation

INDIA IS AT THE CUSP of unprecedented economic growth as a host of factors converge to give wings to its ambitions. This is evidenced by growth of alternative investment funds (AIFs) in past few years. The AIF industry has witnessed a 10-fold increase in assets under management (AUM) in just a decade with total commitments touching ₹11.3 lakh crore in March 2024. The number of funds launched has risen at 13% CAGR over five years to 1,306. India commands almost 20% of Asia Pacific funds dedicated to private equity. It witnesses $50-60 billion private equity deals every year, says Vivek Singla, managing partner and CIO, Private Equity, Incred Alternative Investment.

An AIF is a privately pooled investment vehicle for exposure to alternative asset classes such as private equity, venture capital, hedge funds, real estate, commodities and derivatives. Since the entry barrier is high — minimum capital is ₹1 crore — subscribers are mostly high networth individuals and institutions.

The different AIF categories — Category-I (CAT-I), Category-II (CAT-II) and Category-III (CAT-III) — had come into existence after the implementation of AIF regulations in 2012. CAT-I consists of angel funds, seed funds and social funds, while private equity, venture capital, private credit and real estate debt are part of CAT-II funds. CAT-I and CAT-II invest in debt and equity of non-listed companies. CAT-III includes ‘long only’ and ‘long short’ funds that invest mainly in listed Indian stocks. In FY13, there were just nine CAT-I, 19 CAT-II and six CAT-III funds. In terms of funds launched, CAT-I (294 at end of March 2024) witnessed a significant CAGR of 11% over five years and 42% over three years, reflecting robust investor interest and confidence in the category. CAT-II (total 749) grew at a CAGR of 15% over five years and 33% over three years. CAT-III (total 257) grew at a CAGR of 8% and 52% over five years and three years, respectively.

Top Enablers

The AIF industry’s ascent can be attributed to several factors such as rising incomes, investor awareness and regulatory reforms such as 2012 regulations. Both quantum of wealth and number of wealthy are growing at a rapid pace in the country. This has given rise to an ecosystem where rich young professionals are looking for diversified investment opportu- nities to meet their varied portfolio goals, says Sunil Gurubaxani, operating partner, 35 North Venture Capital.

In a recent survey by Indian Venture Capital Association (IVCA) and Eleveight Strategy Consulting Firm, 74% respondents underlined ‘growing wealth and wealthy in India’ as main drivers for growth of AIFs. As per the survey, other enablers were product innovation (47%), awareness about financial products (37%), enabling regulatory environment (37%), strong distribution network (32%), rise in number of AIFs (32%) and demand from investors (26%).

India’s position among top five economies, coupled with projection that it will maintain one of the youngest populations in the world until 2030, lays a robust foundation for AIFs, says IVCA-Eleveight Report 2024. Expanding infrastructure, third-largest start-up ecosystem and thriving business environment have contributed to success of AIFs. Booming capital markets and general decline in interest rates have made India a popular destination for investors, says the report. According to Hurun Research Institute’s global rich list, there are 3,279 billionaires worldwide. The Fortune India Rich List has 185 dollar billionaires. As per Knight Frank’s ‘Wealth Report 2023’, India is projected to be home to 19,119 ultra high networth individuals or ultra HNIs (net worth exceeding $30 million) and 16.5 lakh HNIs (assets valued at ₹8.35 crore) by 2027. It has one of the largest population of start-ups founders who are playing a pivotal role in both supply and demand, says R. Pallavarajan, founder, pmsbazaar, India’s leading platform for portfolio management services and AIFs. Domestic institutions such as LIC and SIDBI are also pouring money into AIFs, he adds.

India is poised to have 250 unicorns by 2025, reflecting potential of the start-up ecosystem. It also has over 300 family offices. Projections indicate family offices will contribute around 30% of the $100 billion that start-ups are expected to raise by 2025. India has become the world’s 3rd-largest start-up ecosystem with over 1,17,254 Department for Promotion of Industry and Internal Trade recognised start-ups. Founders of high-growth start-ups require specialised financial products. AIFs offer tailored solutions such as venture debt, which provides access to collateral-free borrowing, meeting the unique requirements of start-up entrepreneurs, says IVCA-Eleveight Report 2024.

The Challenges

There is ample supply of capital to AIFs but lack of quality growth companies makes a fund manager’s task difficult, says Singla of Incred Alternative Investment. Till two years ago, valuation was a big problem, but in past 18 months, private markets have seen a wave of correction, says Singla. Pallavarajan of pmsbazaar says data gathering is a big challenge. Like the mutual fund industry, there is no AUM data for AIFs. “There is paucity of data since money is being raised privately. Even Sebi does not provide data for number of clients added annually,” he says. Non-availability of information in the form of research reports is a challenge as well. Fund managers have to depend on wealth counters as AIF products are not marketed publicly, say AIF industry veterans.

Comprehensive digitisation of the AIF ecosystem along with standardised reporting is essential for efficient investor on-boarding, says IVCA-Eleveight Report 2024. Establishing a unified repository for industry communication, akin to AMFI, will enhance clarity and cohesion and ensure trust and transparency, says the report.