 "Alternative investments become part of mainstream")
In a matter of a decade, India's alternative investment industry has grown to Rs 27,500 crore in size. In fact, much of this has come in the past three years. And experts believe this is just the beginning - not only will its size grow but the industry will also see expansion in terms of product offering and penetration.
While not much action happened in the 2000-2005 period, the momentum picked from 2005, with global markets rallies boosting overall sentiment. Driven by structural improvements, especially on the regulatory side, this nascent industry started evolving and saw rapid growth from 2012. These changes followed the crash in prices across asset classes in 2008, led by the Lehman crisis. There has been no looking back since.
However, there has been a stark difference between the initial phase that started in 2005 and the period after 2011. In the initial phase (2005-2008), the performance of the alternative investment funds (AIFs) was linked to public markets, which defeated the underlying purpose of achieving diversification and lower volatility without losing on returns. But, as investors and money managers realised, the industry has taken a turn for the better. (Activities of Alternative Investment Funds (AIFs))
The real change came after 2010. Abhijit Bhave, CEO of Karvy Private Wealth, says, "2008-09 was an era of struggle. Of the flood of PE and realty funds that came in the pre-Lehman period, many shut shop after the global financial crisis. Only a few survived and a handful prospered." A lot has changed since, he adds.
On the regulatory side, there have been dramatic changes since the Securities and Exchange Board of India (Sebi) notified the Sebi (Alternative Investment Funds) Regulations, 2012 ('AIF Regulations') on May 21, 2012. This has helped in an orderly development of the AIF space. Apart from proper registration of participants and documentation of products/agreements, the key regulations require an investor to make a minimum investment of Rs 1 crore. This helps keep out gullible retail investors who might not have complete knowledge and the risk appetite for such products. Experts say, for an entity investing a crore of rupees in AIFs is mostly well informed about the products and risks.
Secondly, there also is a minimum tenure for the products/offerings. Two of the three categories (Category I and II) as classified under AIF Regulations must have a minimum tenure of three years and must be close-ended. This, however, is not applicable for Category III. More importantly, as Bhave points out, the manager or sponsor of the AIF now needs to have skin in the game. He or she must have continuing investment in the AIF of 2.5 per cent of the corpus or Rs 5 crore, whichever is lower, ensuring that the investors' investments are taken care of better. This is important though the HNI clients who invest in such products have the necessary risk appetite & long term horizon.
Unlike earlier when disclosure standards were very low, now investors take a more informed decision, due to strengthening of the regulations. Now it is all about IRR (internal rate of return), typically ranging upwards of 18 per cent that investors seek. The investor has to be informed well about the fund strategy and a good amount of disclosures regarding performance, expenses and portfolio have to be made at regular intervals, some of which need to be audited by a third party.
"In India, the introduction and evolution of a strong regulatory oversight and framework has certainly provided a fillip to the industry and has boosted investor confidence. The registrations and mobilisation data clearly bears this out. The emerging clarity on taxation for the industry and the opening up of the industry to foreign investors is a big leg up," says Vinay.
But, unlike in public markets, where retail investors have to be well protected, experts say investors in the AIF space are savvy and typically have their own legal recourse. The experts, though, add that disputes are rare.
The Indian AIF industry, however, does not mirror its global peer, and there are visible differences.
Vinay says: "The evolution of the industry appears to be markedly different when compared to the global trends. While high-networth individuals and the mass affluent are catching on, the global AI (alternative investment) investor universe has been predominantly institutional in character. The HNIs and family offices have by and large led the initial AI surge in India."
The not-so-positive experience of the 2005-2009 period is among reasons why institutional investors have largely stayed away, but as regulations have strengthened, industry experts see them coming back.
The other feature of the Indian AIF industry is that investor allocations to AI have not strictly followed the asset allocation/non-correlated risk-return paradigm. The growth has been largely around product innovation and introduction of newer investment themes, says Vinay.
The Indian AIF market is also different from the product perspective. While PE and realty-based funds account for the lion's share of the assets under management (about 40 per cent), debt- and equity-based funds are popular, too. There are different options within these categories as well. For instance, a common option is the SPV (special-purpose vehicle) -led funding to realty players. Unlike earlier, when an investor's money was put in real estate companies or even shares of listed companies, most of the deals now involve investing in project-specific SPVs. This allows greater control to the investor/fund house, and better transparency. There are escrow accounts that manage the inflow and outflow pertaining to the project. And the returns are attractive enough at 18-20 per cent, net of expenses. This is a far more transformed product, say experts, given that in many cases the funds did not do well earlier, even as the real estate asset class fared better.
There are then the long-short funds, which companies like Ambit Capital, Reliance Asset Management, etc, have launched. In such cases, however, liquidity is relatively good, say experts.
There have been flops as well. Bhave explains: "The film/art funds caught investors' fancy in the initial years. The reasons for such funds not taking off thereafter was that there were no scientific methods; one had to take a call based on the gut feeling. There were some instances of mismanagement, too."
The flip side for the AIF industry is that liquidity is very limited, and so are exit options. Only a few funds provide exit options, where other investors are allowed to take over the investment of the investor looking to exit or by way of dividends. Also, investors would also be taking a higher risk by betting on the fund manager/house on generating desired returns. But these could change as the industry works around exit options as part of the deal.
According to estimates, the road ahead is very long. India's AIF industry is still small and evolving when compared with the $10.8 trillion global AI industry (estimates for 2015), which is projected to grow to $18.1 trillion by 2020 (PWC 2015 Alternative Investments Survey). Within this, the industry in Asia is seen growing from an estimated $2.5 trillion in 2015 to $4.8 trillion in 2020.
The Indian AIF industry, too, has grown fast and the trend should continue, say experts. For instance, Category I of AIF has grown six and a half times (in terms of commitments raised) between September 2013 and September 2015, to nearly Rs 9,300 crore, while Category III has grown over 11 times to Rs 3,516 crore during this period. Category II, the largest, has commitments to the tune of Rs 14,700 crore and had raised Rs 7,860 crore till September 2015.
Among key areas that have attracted investments are technology (including e-commerce), education, health care, real estate (including rental yield funds), start-ups (including through aggregator funding route), logistics and crowd funding.
Centrum Wealth Management's Vinay says: "The most significant development in this space is what is now popularly known as mainstreaming of alternatives. There has been a dramatic growth in alternatives packaged in retail structures like mutual funds, UCITs (undertakings for collective investments in transferable securities) and liquid alternative funds from asset managers."
Karvy's Bhave believes the industry should see massive growth going ahead, with risk appetite coming back and product offerings widening.
Vinay estimates the Indian AIF to grow to Rs 75,000 crore in size over the next five years, at a compound annual rate of roughly 25 per cent.
While not much action happened in the 2000-2005 period, the momentum picked from 2005, with global markets rallies boosting overall sentiment. Driven by structural improvements, especially on the regulatory side, this nascent industry started evolving and saw rapid growth from 2012. These changes followed the crash in prices across asset classes in 2008, led by the Lehman crisis. There has been no looking back since.
However, there has been a stark difference between the initial phase that started in 2005 and the period after 2011. In the initial phase (2005-2008), the performance of the alternative investment funds (AIFs) was linked to public markets, which defeated the underlying purpose of achieving diversification and lower volatility without losing on returns. But, as investors and money managers realised, the industry has taken a turn for the better. (Activities of Alternative Investment Funds (AIFs))
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"The basic appeal of Alternative Investments (defined simply as an any investment that is not a long position in fixed income, equities or cash) lies in their low correlation with the traditional asset classes and therefore has a meaningful diversifying potential in the overall portfolio. From a practical point of view, since the GFC (Global Financial Crisis) when equities became very volatile and bonds moved into anaemic yields the world over, Alternatives have become extremely popular with investors globally," says Arpita Vinay, Executive Director, Centrum Wealth Management.
The real change came after 2010. Abhijit Bhave, CEO of Karvy Private Wealth, says, "2008-09 was an era of struggle. Of the flood of PE and realty funds that came in the pre-Lehman period, many shut shop after the global financial crisis. Only a few survived and a handful prospered." A lot has changed since, he adds.
On the regulatory side, there have been dramatic changes since the Securities and Exchange Board of India (Sebi) notified the Sebi (Alternative Investment Funds) Regulations, 2012 ('AIF Regulations') on May 21, 2012. This has helped in an orderly development of the AIF space. Apart from proper registration of participants and documentation of products/agreements, the key regulations require an investor to make a minimum investment of Rs 1 crore. This helps keep out gullible retail investors who might not have complete knowledge and the risk appetite for such products. Experts say, for an entity investing a crore of rupees in AIFs is mostly well informed about the products and risks.
Secondly, there also is a minimum tenure for the products/offerings. Two of the three categories (Category I and II) as classified under AIF Regulations must have a minimum tenure of three years and must be close-ended. This, however, is not applicable for Category III. More importantly, as Bhave points out, the manager or sponsor of the AIF now needs to have skin in the game. He or she must have continuing investment in the AIF of 2.5 per cent of the corpus or Rs 5 crore, whichever is lower, ensuring that the investors' investments are taken care of better. This is important though the HNI clients who invest in such products have the necessary risk appetite & long term horizon.
Unlike earlier when disclosure standards were very low, now investors take a more informed decision, due to strengthening of the regulations. Now it is all about IRR (internal rate of return), typically ranging upwards of 18 per cent that investors seek. The investor has to be informed well about the fund strategy and a good amount of disclosures regarding performance, expenses and portfolio have to be made at regular intervals, some of which need to be audited by a third party.
"In India, the introduction and evolution of a strong regulatory oversight and framework has certainly provided a fillip to the industry and has boosted investor confidence. The registrations and mobilisation data clearly bears this out. The emerging clarity on taxation for the industry and the opening up of the industry to foreign investors is a big leg up," says Vinay.
But, unlike in public markets, where retail investors have to be well protected, experts say investors in the AIF space are savvy and typically have their own legal recourse. The experts, though, add that disputes are rare.
The Indian AIF industry, however, does not mirror its global peer, and there are visible differences.
Vinay says: "The evolution of the industry appears to be markedly different when compared to the global trends. While high-networth individuals and the mass affluent are catching on, the global AI (alternative investment) investor universe has been predominantly institutional in character. The HNIs and family offices have by and large led the initial AI surge in India."
The not-so-positive experience of the 2005-2009 period is among reasons why institutional investors have largely stayed away, but as regulations have strengthened, industry experts see them coming back.
The other feature of the Indian AIF industry is that investor allocations to AI have not strictly followed the asset allocation/non-correlated risk-return paradigm. The growth has been largely around product innovation and introduction of newer investment themes, says Vinay.
The Indian AIF market is also different from the product perspective. While PE and realty-based funds account for the lion's share of the assets under management (about 40 per cent), debt- and equity-based funds are popular, too. There are different options within these categories as well. For instance, a common option is the SPV (special-purpose vehicle) -led funding to realty players. Unlike earlier, when an investor's money was put in real estate companies or even shares of listed companies, most of the deals now involve investing in project-specific SPVs. This allows greater control to the investor/fund house, and better transparency. There are escrow accounts that manage the inflow and outflow pertaining to the project. And the returns are attractive enough at 18-20 per cent, net of expenses. This is a far more transformed product, say experts, given that in many cases the funds did not do well earlier, even as the real estate asset class fared better.
There are then the long-short funds, which companies like Ambit Capital, Reliance Asset Management, etc, have launched. In such cases, however, liquidity is relatively good, say experts.
There have been flops as well. Bhave explains: "The film/art funds caught investors' fancy in the initial years. The reasons for such funds not taking off thereafter was that there were no scientific methods; one had to take a call based on the gut feeling. There were some instances of mismanagement, too."
The flip side for the AIF industry is that liquidity is very limited, and so are exit options. Only a few funds provide exit options, where other investors are allowed to take over the investment of the investor looking to exit or by way of dividends. Also, investors would also be taking a higher risk by betting on the fund manager/house on generating desired returns. But these could change as the industry works around exit options as part of the deal.
According to estimates, the road ahead is very long. India's AIF industry is still small and evolving when compared with the $10.8 trillion global AI industry (estimates for 2015), which is projected to grow to $18.1 trillion by 2020 (PWC 2015 Alternative Investments Survey). Within this, the industry in Asia is seen growing from an estimated $2.5 trillion in 2015 to $4.8 trillion in 2020.
The Indian AIF industry, too, has grown fast and the trend should continue, say experts. For instance, Category I of AIF has grown six and a half times (in terms of commitments raised) between September 2013 and September 2015, to nearly Rs 9,300 crore, while Category III has grown over 11 times to Rs 3,516 crore during this period. Category II, the largest, has commitments to the tune of Rs 14,700 crore and had raised Rs 7,860 crore till September 2015.
Among key areas that have attracted investments are technology (including e-commerce), education, health care, real estate (including rental yield funds), start-ups (including through aggregator funding route), logistics and crowd funding.
Centrum Wealth Management's Vinay says: "The most significant development in this space is what is now popularly known as mainstreaming of alternatives. There has been a dramatic growth in alternatives packaged in retail structures like mutual funds, UCITs (undertakings for collective investments in transferable securities) and liquid alternative funds from asset managers."
Karvy's Bhave believes the industry should see massive growth going ahead, with risk appetite coming back and product offerings widening.
Vinay estimates the Indian AIF to grow to Rs 75,000 crore in size over the next five years, at a compound annual rate of roughly 25 per cent.