SEBI guidelines classify alternative investment fund (AIF) as a privately pooled investment vehicle for sophisticated investors. The ‘privately’ here stands for private placement. To elaborate, unlike mutual fund NFOs or equity IPOs, which are open to general public for subscription, AIFs can only be sold and marketed privately to savvy investors. In short, AIFs cannot be branded, advertised and distributed like mutual funds says, Kenneth Andrade, Founder, Old Bridge Capital Management.
What is private placement?
Private placement is sale of the fund’s units to a limited group of individuals. Typically, AIFs target affluent HNIs and UHNIs, foreign offshore investors and corporates. While any individual can invest in a mutual fund NFO or equity IPO independently, AIF investments are through offer only. Generally, an investor’s financial advisor at times accompanied by the AIF’s sales personnel share the placement memorandum (similar to an SID in mutual fund parlance) of the fund with prospective investors. According to Nalin Moniz, CIO-Alternative Equity, Edelweiss this one-on-one interaction gives AIFs an opportunity to explain the unique features of a scheme and to gauge client suitability.
How are these funds marketed and sold?
AIF marketing generally happens face-to-face with clients. They can be sold through distributors or on house call. Pankaj Murarka, Founder, Renaissance Investment Managers shares that wealth managers receive complete information about the AIFs features and investment strategy from the sponsors. Alternatively, the sponsors may conduct client events along with wealth management firms to explain the product features to their clients. In case of big ticket investors, the AIF’s sales personnel may accompany the wealth manager on call, added Pankaj.
Why private placement?
AIFs require minimum investment of at least Rs.1 crore and come with a lock-in period. While the investment size itself puts AIFs out of the grasp of a majority of investors, private placement prevents amateur investors from investing their entire life savings in an AIF.
AIFs as their name suggests invest in alternative assets like venture capital, structured debt, private equity to name a few. The risk associated with these investments tends to be different from traditional equity and debt, which makes them more suitable for sophisticated investors.