AIFs had seen commitments worth ₹87,840 crore in 2019-20 due to the impact of the covid-19 pandemic.
AIFs are divided into three categories. Category I comprises angel funds, social impact funds, small and mid-size enterprise (SME) funds and infrastructure funds. Category 2 comprises private equity, venture capital and debt funds. Category 3 funds typically invest in public markets such as hedge funds.
The biggest chunk of commitments were for Category 2 AIFs, garnering ₹1.62 trillion worth of commitments, followed by category 3 and 1 receiving commitments worth ₹18,766 crore and ₹8,815 crore, respectively.
To be sure, the figures are for commitments tied up by fund managers and not the actual money raised, since AIFs have staggered capital drawdown plans and do not need the committed capital upfront.
While FY22 was a record year for AIFs, the alternatives asset class is still an emerging area and lags far behind other asset classes such as public equities and fixed income.
“Last year was good for most asset classes; interest rates were low, so there was strong client demand for various kinds of products. Globally, alternatives is roughly 15% of the total AUM (assets under management), of which more than half is private equity. However, in India, alternatives are still fairly new to investors and for product providers,” said Anshu Kapoor, president and head, investment management, Edelweiss Wealth.
“In the last 10 years, $220 billion in PE investments came into the Indian market, compared to $170-180 billion of FII inflows, but all of this was foreign capital. Over this period, private markets have become large and sophisticated, and are ripe for local capital to enter,” he added.
Today, investors have a large bouquet of products to choose from including growth, early-stage, credit, venture debt and infrastructure, and this has driven the growth of the industry. This supply is also creating more demand, Kapoor said.
The demand for AIFs in FY22 was strong both for equity and debt, said experts.
“Driven by the acceleration in digital adoption due to covid, over the last two years, venture capital became a major attraction for high net-worth individuals and family offices to invest in. Last year, we also saw a lot of capital go towards late-stage tech funds or pre-IPO (initial public offering) funds. The third driver on equity was growth capital, which has started witnessing strong traction with clients,” said Nitin Singh, managing director and chief executive, Avendus Wealth Management.
“On the debt side, venture debt has emerged as a major asset class, given the strong track record of fund managers. There is strong demand among clients for venture debt. Performing credit, too, has become a major destination of investments for high networth individuals and family offices,” added Singh.
While current macro headwinds may make investors more cautious on riskier bets such as alternatives, experts said the growth trend in the alternative investment funds industry will continue, considering the low penetration of the asset class.
“The current slowdown has had an impact on late-stage funds, but interest for venture capital and growth stage funds continues to remain strong and will only grow, going ahead. Debt appetite is also getting bigger and this asset class, too, will see a lot more capital flows,” said Avendus’ Singh.
Edelweiss’ Kapoor said with rapid wealth creation happening in India, clients are seeking more sophisticated products.
“Sebi’s accredited investor regulations will also boost the space. Product providers can create customized products for this class of investors and they will also have less restrictions on investing in AIFs.”