What is the scope of AIFs in India?
We have come a long way in the seven years since AIF regulations came into play. Over the last five years alone, funds raised by all three categories of AIFs combined have approximately grown at a CAGR of 70%. As of March 31, 2019, total funds raised under AIFs stood at Rs.1.34 lakh crore. Within the categories, funds raised by Category III funds (which allow for leverage and include hedge funds) registered a compounded annual growth rate of 85%.
There are many reasons for this explosive growth. First, this asset class gives investors access to differentiated investment strategies and parts of the market that cannot be offered in an MF or PMS format; for example - hedge fund strategies or investments in unlisted securities.
Second, the clarity on regulations and the relative ease in setting up a vehicle has allowed entrepreneurial fund managers to launch their own, specialised, unique funds. Fund managers say that the AIF construct has made the entire process less capital intensive and far more seamless, operations wise.
We believe that the segment will continue to grow as more of both investors and quality fund managers participate. The depth and breadth of the industry is expected to improve and sophisticated fund structures are likely to emerge. Discerning investors can therefore allocate capital across the risk and return curve and reduce their “forced” allocations in traditional investment avenues.
Since Avendus is among the leading wealth management firms when it comes to ESG funds and category 3 AIFs, how do you see these funds succeeding in India?
India’s financial markets, which have mostly been about simpler equity and debt instruments, needed to deepen in terms of the diversity and complexity of investment strategies, including the use of leverage/short positions. Launching onshore hedge funds was possible thanks to the Category III AIF construct. From a non-existent segment around seven years ago, the hedge fund industry in India today stands at around Rs.12,000 crore** and counting.
As far as ESG is concerned, over the last few years, global investors have been embracing responsible investing, which involves incorporating Environmental, Social and Governance (ESG) factors into investment processes. It is estimated that 30% of all global assets (~US$30 trillion) are managed under some element of ESG / responsible investing, according to the Global Sustainable Investment Review. By supporting companies that are compliant with ESG parameters, investors can help create a positive ecosystem of responsible businesses, which do the right things and attract the right kind of investors, employees, customers and other stakeholders.
**Source: Avendus
Mutual funds like SBI and Quantum have also started schemes that run based on the ESG investment philosophy. In this backdrop, what are the advantages that an AIF ESG fund provides compared to an ESG fund in a MF?
MFs or AIFs are simply the structure used to package a particular strategy. While Category III allows leverage and complex trading strategies as compared to long-only styles used by MFs, the Cat III fund manager is not necessarily required to use that flexibility. They could technically both use a long-only approach.
Rather than look at the fund’s construct as a differentiator, one must look at a) whether the fund is true to its name, i.e; is it really investing in companies that are making good on the ESG promise and b) the quality of the fund management team. For instance, does the fund have a methodical process in place to separate the wheat from the chaff?
The Avendus ESG fund has established a robust framework for evaluating companies across ESG parameters in partnership with Institutional Investor Advisory Services (IiAS), India's leading proxy advisory firm.
What is the roadmap of Avendus Wealth Management for the next three years?
We believe that while the overall investment environment will be positive, it will not be benign. The credit crisis and the sharp rise in volatility in public markets have highlighted the need for a good investment advisor who can work with clients on their asset allocation strategy, avoid pitfalls and continue strategizing over long term investment decisions.
We have put in substantial efforts behind building out our advisory platform, in terms of advisory talent, technology and analytics, and we believe that more than 50% of our assets and clients would move under advisory, even while we continue our accelerated pace of growth.
We also believe that investors will continue to look for new themes, ideas and fund managers. We shall continue to seek quality investment ideas or manufacture them ourselves (through our group companies).
How do you see the talent available in the AIF segment when it comes to distribution? Is it enough currently or a surge is needed to spread the presence in India?
This is a very pertinent question. The mutual fund industry has seen very good growth over the last few years on the back of a strong network of distributors. SEBI has played a key role in promoting the product. It was very helpful that a) the minimum ticket size was small, and b) they were almost always liquid.
AIFs, where the minimum amount is Rs. 1 crore, and in a lot of cases the funds are “locked -in”, may not lend themselves for investment by a large segment. The regulators have communicated that these products are meant for sophisticated investors. Hence, the distributors also will need to be more sophisticated so that they can assess if these products can fit into a client’s portfolio while being able to explain the risks associated with such products.
We do believe that the present distribution of AIFs (through wealth managers and banks) is not enough as they do not have the outreach that the traditional distribution channels have. A section of the distributors may move to become registered advisors and they probably may be the ones at the vanguard of the new AIF distribution model.
What is the distributor commission model in AIF segment in India?
It varies and is very specific and unique to each fund and scheme.
What are the regulatory changes that can provide a fillip to the AIF industry?
While Cat I & II AIF vehicles have been awarded a tax pass through status, Cat III vehicles are still not in that bracket. If this status is awarded to Cat III AIFs as well, this could incentivize more investors.
Greater clarity on secondary market for AIF units would also be useful as this could allow smaller amounts to be “traded”, enhancing liquidity in the segment.
‘Mutual funds sahi hai’ campaign has created a buzz about mutual funds in India. Will something on similar lines be a good idea for AIFs?
We must remember that mutual funds were “re-launched” in 1994. It has taken almost 25 years for the current level of market penetration. A mass AIF campaign will work better when there is widespread awareness and understanding of the product, and that could still be some time away.
