AIF had seen the commitments worth 87,840 crore in 2019-20 due to the impact of the Kovid-19 pandemic.
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AIF is divided into three categories. Category I includes angel funds, social impact funds, small and medium-sized enterprise (SME) funds and infrastructure funds. Category 2 includes private equity, venture capital and debt funds. Category 3 funds typically invest in public markets such as hedge funds.
The largest share of commitments were for Category 2 AIFs, achieving 1.62 trillion worth of commitments, followed by Category 3 and 1 achievable commitments 18,766 crore and 8,815 crores respectively.
To be sure, the figures are for tied commitments by fund managers and not the funds actually raised, as AIFs have staggered capital drawdown schemes and do not require committed capital.
While FY22 was a record year for AIFs, the alternative asset class is still an emerging sector and lags far behind other asset classes such as public equities and fixed income.
“Last year has been good for most of the asset classes; Interest rates were low, so there was strong customer demand for a variety of products. Globally, options account for about 15% of total AUM (assets under management), of which more than half is private equity. However, in India, the options are still quite new for investors and product providers,” said Anshu Kapoor, President and Head, Investment Management, Edelweiss Wealth.
“In the last 10 years, PE investment of $220 billion came into the Indian market, while FIIs had inflows of $170-180 billion, but it was all foreign capital. During this period, private markets have become large and sophisticated, and are ready for the entry of local capital.”
Today, investors have a large bouquet of products to choose from, including development, early stage, loans, venture loans and infrastructure, and this has driven the growth of the industry. Kapoor said this supply is also creating more demand.
Experts said the demand for AIFs in FY22 was strong for both equity and debt.
“Inspired by the rapid increase in digital adoption due to Covid, over the past two years, venture capital has become a major attraction for high net worth individuals and family offices to invest in. Last year, we also saw a lot of capital from late-stage tech funds or pre-IPO (initial public offering) funds. Nitin Singh, Managing Director and Chief Executive, Avendus Wealth Management said, the third driver on equity was growth capital, which has started seeing strong traction with clients.
“On the debt side, venture lending has emerged as a major asset class, given the strong track record of fund managers. There is a strong demand among customers for enterprise loans. Credit performance has also become a major investment destination for high net worth individuals and family offices,” Singh said.
While the current macro headwinds may make investors more cautious on riskier bets like options, experts said the growth trend in the alternative investment fund industry will continue, given 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 remains strong and will only increase going forward. Debt appetite is also increasing and this asset class is also very high. We will see capital inflows.”
Edelweiss’s Kapoor said that wealth creation is taking place in India at a rapid pace, with customers demanding more sophisticated products.
“Sebi recognized investor regulations will also give a boost to the space. Product providers can create customized products for this segment of investors and will also have fewer restrictions on investing in AIFs.”