Fund managers make switch to high-growth AIF industry

Marquee fund managers are making the switch from mutual funds to newly introduced alternative investment funds (AIFs), which are seeing a rapid growth in commitments thanks to a spike in the number of wealthy investors.

Last week, Franklin Templeton appointed S Naganath, chief investment officer (CIO) of rival DSP Blackrock, as head of its AIF division. Earlier this month, former head of equities of IDFC MF Kenneth Andrade, known for picking mid-cap winners, announced the launch of an AIF, eyeing to raise Rs 400 crore from rich investors.

Also, Sunil Singhania, former CIO of Reliance MF, was moved to parent Reliance Capital as global head–equities a few months ago, a role that would focus on expanding the footprint of the company in products such as AIFs and wealth management. In March, Rajesh Sehgal, executive director of Franklin Templeton Asset Management, ventured into the AIF space through the firm he founded: Equanimity Investments.

 

This shift is not surprising, considering the growth of the AIF industry has been phenomenal. There are currently 366 AIFs registered with the Securities and Exchange Board of India (Sebi), a jump from 92 two years back. Similarly, the total investments received jumped to Rs 43,489 crore in September 2017, as against Rs 11,254 crore in September 2015.

“The landscape of Indian investors is changing fast with a huge spike in wealthy investors and family offices. This has created a demand for products like AIFs. Fund managers and professionals, especially with entrepreneurship aspirations, are increasingly turning towards AIFs as they offer greater flexibility. The capital requirement and compliance burden is also less,” said Arvind Bansal, head of products and advisory, Avendus Wealth Management.

Not just from MFs, the AIF industry is seeing the influx of top money managers from broking and private equity firms as well. A few months back, boutique investment banking firm Avendus Capital hired Andrew Holland from Ambit Capital Advisors to run their AIF arm – Avendus Alternative Strategies.

Market participants say the transition is much higher in the mid and low level as AIF is much higher as the industry is grappling with shortage of manpower.

Buoyancy in the listed stocks and investment opportunities in the unlisted space are providing impetus to the AIF industry, experts say. There are three categories of AIFs -- category-I deals with infrastructure- and social venture-related investments; category-II comprises private equity and venture capital funds; and category-III has hedge funds, which invest in publicly-traded securities.

Easing of the regulatory framework is another key reason for the rise in the Indian hedge fund industry. To clear regulatory hurdles and provide AIFs a more robust working environment, Sebi had appointed an 11-member committee headed by Infosys co-founder Narayana Murthy. It has given two reports so far, suggesting numerous changes. In the Union Budget 2016, the government gave pass-through taxation status for category-I and II AIFs. Last year, RBI and Sebi also opened up the AIF market for foreign institutional investors. Recently, Sebi exempted AIFs from the minimum lock-in period for pre-IPO investments.

“Wealthy investors can avail of several investment opportunities by investing through AIFs, which are not available normally. For instance, a lot of pre-IPO deals investments happen via AIFs at attractive valuations. AIFs can also bid in IPOs under the QIB (qualified institutional buyer) category where chances of allocation are higher,” said Tejesh Chitlangi, partner, IC Legal.

There are three popular routes for wealth management: mutual funds, portfolio management services (PMS), and AIFs. Mutual funds are the most popular among the masses. However, wealthy investors are on constant lookout for products that could beat the market returns even if it entails taking higher risk. Such investors opt for PMS or AIF. PMS services are mostly focused only on the listed space, while AIFs provide a wider bouquet of investments.