Debt alternative investment funds investors lower return expectations

The return expectations of inv­estors in debt real estate alternative investment funds (AIF) lowered during the Covid-19 pandemic, but hopes in equity AIFs stayed afloat, said people intrinsically connected with these debt funds in real estate.

AIFs are privately pooled investment funds approved by the capital markets regulator Securities and Exchange Board of India for different categories of asset classes.

The reason for the lowered expectations is that the returns from traditional investments, such as credit-risk mutual funds (MFs), have dropped 200-300 basis points (bps) and credit AIFs still generating better returns. Credit-risk MFs are funds that invest 65 per cent of the corpus in not-so highly rated companies.

Investors used to expect 17-20 per cent gross returns for longer duration credit alternative funds. Now they are willing to look at even shorter duration AIFs offering 12-14 per cent credit-based returns, said Hemant Daga, chief executive at Edelweiss Asset Management. 

Recently, Motilal Oswal Real Estate launched a Rs 800-crore AIF, focused on giving construction finance to property developers. 

“Investors are happy investing in products delivering slig­htly lower returns, compared to the pre-Covid era when they were seeking returns upwards of high teens from alternative products,” said Daga.

Daga said most of the high networth individuals (HNIs) and family offices investing in credit-risk MFs have realised that the closed-ended nature of AIFs are a better way to invest in illiquid or structured credit instruments.

“Since returns from traditional investments have dropped 200-300 bps over the past year, there is interest from HNIs and family offices to invest in alternative funds focusing on credit and yielding strategies,” he added.

Added Nitin Gupta, managing director (MD) at Macquarie Capital, “Debt AIFs are subscri­bed mainly by domestic investors and take exposure to high-grade assets/loan against shares. Return expectations have come down there since risk-free rates, too, have declined.”

In the case of equity AIFs for real estate, the return expectations have remained at over 22 per cent for asset classes, such as residential properties, said experts.

“Normally the equity money is given by global investors and they expect dollar returns of 15-16 per cent. Then there is a hedging cost of 5-6 per cent. So, the equity return expectations have remained the same at over 22 per cent,” said a senior executive at an investment banking firm.

Gupta of Macquarie Capital added that such AIFs mainly take exposure to development assets and hence, there is no change in return expectations.

Recently, Godrej Fund Management announced a fund-raise of $200 million from Netherlands-based APG Asset Management N.V. for its $500-million office fund. It is looking to raise a similar amount from other global investors. 

In another instance, Welsp­un One Logistics Parks, promo­ted by Welspun Group, launc­hed a Rs 500-crore warehousing fund for domestic investors. 

“Given the current interest-rate scenario and high valuations in equity markets, investors are looking at diversification and probably leaning towards an investment opportunity where the basis of the return is more realistic. In absolute terms, the return expectations are lower, given the low risk-free return. So, the benchmark for adjusting for risk is that much lower,” said Anshul Singhal, MD, Welspun One Logistics Parks.

Shobhit Agarwal, MD of Anarock Capital, said the overall return expectations are higher than what they were during the lockdown. “Family offices and HNIs are looking at multiple options. They are evaluating opportunities directly and through private equity funds — be it equity or structured debt-focused. But the market situation is way better than what is was at the end of the first half of 2020.”

Fund managers say investors today are looking at shorter duration funds, compared to longer duration ones floated by fund managers earlier.

“Since we have restricted the tenure of the fund to four years, we have seen acceptability and willingness from investors to evaluate such an opportunity,” said Singhal of Welspun.