Reliance has been a long-term player in both PMS and AIF category. How have these categories grown over the years?
AIFs (alternative investment funds) and PMS (portfolio management services) have grown phenomenally over the last few years and strong and forward –looking regulatory framework has played a key role in this. The regulations have maintained a fine balance between good controls to protect investor interest and flexibility for fund managers to launch innovative funds.
Talking about AIFs, the industry has seen massive investor interest in the last seven years. We can measure the success of the industry by three parameters:
Investor acceptance: Both HNIs and institutional investors are investing in AIFs in large numbers.
Breadth of the industry: We have well over 400 investment managers ranging from boutique firms, asset management companies, global specialists and domestic investment banking firms
Product variety: We have seen a wide variety of product launches in this space and investment managers continue to innovate.
While PMS had a slow start compared to AIFs, its acceptance has increased over the years. Currently, equity PMS assets stand at Rs. 1.1 lakh crore, and majority (estimated at 80%) of it has come from domestic HNIs.
This above numbers are testimony to the fact that both PMS and AIF have become mainstream.
What are the opportunities in alternatives?
The AIF structure is extremely flexible. On debt front, we have high yield debt, mezzanine debt, distressed debt, infrastructure debt, structured debt to name a few. In the equity space, we have long only equity, private equity, pre IPO funds, venture capital funds, social venture funds, etc. There are also strategies like long short-funds. Overall, the breadth and scope of the industry is so vast that it allows us to explore different niche investment strategies to generate returns for the investors.
What are the growth drivers for private debt?
Investors now understand that debt is not one homogenous hole. Under debt there are different categories based on varying risk-return attributes. This will help the space to grow.
Moreover, the recent credit events are likely to cause both investment managers as well as investors, to favourably consider AIFs for credit investment. Hence, going forward we may see more people gravitating towards AIFs as they may be seen as better suited to invest in certain categories of debt.
Real estate sector has been facing challenges on many fronts – falling/stagnant prices, poor liquidity, funds crunch, poor demand and regulatory scrutiny. What is your outlook on the sector?
I believe that the sector has huge scope for growth. The recent regulatory changes have been painful in the short-term but their long-term impact will be positive for the sector. Take Real Estate (Regulation and Development) Act, 2016 (RERA) for instance, it has brought much needed regulation to a largely unregulated sector. Goods and services tax (GST) has reduced the tax differential between under construction and ready possession projects. Demonetisation has reduced the cash transactions in the sector. In addition, the government’s focus on affordable housing through various financial incentives and Pradhan Mantri Awas Yojana (PMAY) will give a huge thrust to the sector in the years to come. As we all know, every sector goes through cycles. While residential real estate is facing some hiccups, as our GDP grows and jobs are created people are naturally going to look for housing.
Along with these factors, the recent NBFC liquidity crunch may also work to the advantage of real estate funds. Earlier, NBFCs dominated structured finance space; now, with a more rational pricing of risk we may see more AIF participation in the space.
How does a real estate fund generate yield for its investors?
There are various structures under real estate. Generally, real estate funds invest money to real estate projects and earn interest income in lieu of it. Broadly, the funds can be classified based on returns and security. According to returns, real estate funds can follow a pure debt structure with fixed returns, a mezzanine structure with part fixed and part variable returns (the variable portion may depend on profits generated by the project) and a completely variable return structure. In terms of security, real estate funds can take a variety of securities against their investment. The investment could be against a fully mortgaged asset, plus a corporate guarantee, personal guarantee, pledge of shares, etc.
Can you share the scope and opportunities in venture capital space?
India is among the top four start-up markets in the world (Silicon Valley USA, Israel, China and India). Currently, there is a lot of innovation happening in tech space in India. The small-unlisted start-ups are primarily receiving funding from foreign investment managers. We recently launched a fund, which will participate in the start-up story.
How do you go about constructing your portfolio? How do you protect the downside?
Each of our AIF businesses (real estate, credit, venture funds) has a separate investment head. Generally, the portfolio creation starts with the investment objective stated in the mandate. Then we evaluate the risk parameters. Since AIFs generally tend to be riskier than the conventional products, hence, risk management forms an integral part of our portfolio creation process. We have an independent risk management team who has developed a risk management framework for our funds. The objective is to manage money such that we are able to deliver the promised outcome based on parameters set out in the offer document.
What are the opportunities in the financial sector that can be better played through the AIF route?
The financial sector offers opportunities in both listed and unlisted space. One can take exposure to this sector through AIFs investing in unlisted firms, AIFs investing in listed firms or other investment vehicles. As important as the route, is how the fund managers identify opportunities.
