AIFs can grow 4-5x to become as big as mutual funds industry, say fund managers

The growth of Alternative Investment Funds (AIFs) as an asset class in India has been significant in the last few years. As per SEBI estimates, fund managers who run AIFs raised nearly Rs 7 lakh crore of capital until 2022 from less than Rs 4.5 lakh crore two years ago. But AIFs can get much bigger, they reckon. “We can be 4-5x more in some years. The Mutual Funds industry is at Rs 40 lakh crore, and we believe AIFs can reach there,” says Pranav Parikh, Managing Partner, Private Equity, Nuvama Asset Management  (one of India’s biggest AIFs).

While speaking at the IVCA Conclave 2023 in Mumbai on Wednesday, Parikh shared, “As more and more people come into equity investments, you naturally want to try other things as well. Because of the regulatory environment, Indian institutions are cautious in nature and their allocations are very low. But we are starting to see a ramp-up now.”

Per SEBI estimates, nearly 72,000 individual commitments have been made to AIFs in India. But experts indicate that alternative investments in India are very different from those globally. “In India, AIFs are being built on the foundation of retail or HNI or Ultra-HNI money compared to global AIFs, which were built on the foundation of institutional money,” Parikh explained. 

What’s interesting, however, is the growing share of domestic capital in AIFs. Compared to a decade ago, when a majority of capital raised was from offshore LPs, nearly 80-90 per cent of funds raised today are domestic money. 

Mandeep Julka, Vice President, Chiratae Ventures, says, “Our first fund from 2006 was backed by one institutional LP from the US. Since then, as of 2022, we did a first close of our growth fund of Rs 1,000 crore, which was more than 90 per cent domestic capital. It’s split between retail, family offices, and larger institutional investors. Things have clearly evolved for investors. The ecosystem has grown, which is great for everyone, and also the depth of data available on the market is other is very nuanced now.”

Highlighting the critical importance of domestic capital in AIFs, Nupur Garg, Founder of WinPE, shares, “I believe no industry can really grow unless there is domestic capital that shows faith in it. If the domestic pool of investors do not believe that this industry will stay for the long-term, how do we expect offshore investors to have the same level of confidence?”

Earlier, offshore capital was coming on the back of India being an emerging market. But, increasingly, the faith domestic investors show will directly determine the flow of offshore capital. 

Garg also credits the participation of India’s Tier 2-3 cities in the growing pool of domestic capital. “India’s Tier 2+ cities have a lot of family and generational wealth and their participation has been key in the wealth creation that the startup ecosystem has brought about. All of that has played out in favour of the industry,” she says. 

The local LP ecosystem is also growing, with more and more domestic investors believing in Indian startup successes. Earlier, Indian investors were not able to take a long-term view on this asset class. Now LPs are committing up to 10-12 years. “We have raised 50 per cent of our current fund in less than two months from existing LPs,” reveals Anirudh Damani, Managing Partner, Artha Venture Fund, adding, “We get all the local LPs and local startups in one room every month for an event. It demystified the entire thing about early-stage [investing] and became educational for LPs. Now, many of the LPs are customers of the start-ups we’re investing in.”

Take Motilal Oswal Alternates, for instance. The homegrown AIF has raised two large funds (one in private equity and one in real estate) primarily from domestic LPs in a span of five months.  “We have over 700 LPs in the funds. And 90 per cent of the capital has been raised from within the country,” says Chandrakant Soni, Director & Head-Fund Raising & IR, Motilal Oswal Alternates. “Back in 2007, [the concept of] PEs, LPs and GPs weren’t known to many people. From then to now, it is a common phenomena in India.” 

Despite the tremendous growth of the AIF ecosystem, distribution in India remains expensive and complicated. “There are a lot of alt funds being built on push right now. But as distribution fees undergo changes and regulatory interventions come in, ultimately, long-term pull is the only strategy for these alt funds to do well,” says Nuvama Asset’s Parikh. 

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