The last few years have seen many wealthy investors taking exposure to alternative investment funds. In fact, as of December 2017, alternatives funds have raised commitment of Rs.72,259 crore as compared to Rs.7,013 crore in December 2014, a 10-times growth in just three years.
This increased demand has encouraged many fund houses over the years to launch new AIFs. Experts believe that as adding AIFs to their product bouquet makes business sense.
AIFs allow them to leverage their existing wealthy investor base. Further, as AIFs offer investment opportunities in assets and securities not accessible to traditional mutual fund schemes, AMCs can broaden their investment expertise by offering AIFs.
Another equally important factor is that AIFs are structurally different from mutual funds due to which they are profitable for AMCs from day one. To elaborate, the minimum investment size in an AIF is quite large hence they do not face issues mutual funds face such as transaction cost eating into profits in case of small investments. In addition, AIFs have more flexibility in charging fees. Thus, in a rally, they can earn a significant amount through performance based fees.
At present, 15 AMCs have launched or are managing alternative funds. In addition, group companies of around six AMCs have registered as AIFs with SEBI.
There are three categories of AIFs – category-1 deals with infrastructure, angel funds and social venture funds; category-2 comprises real estate funds, private equity funds; and category-3 has hedge funds and PIPE Funds.
So far, majority of the asset management companies have focussed on category-2 and category-3 AIFs.
A key reason for the popularity of category-3 AIFs is that it is a natural extension of existing investment basket of mutual funds, said Shahzad Madon, Head PMS and Alternative Strategies, Reliance Capital.
Nalin Moniz, Chief Investment Officer – Alternative Equity, Edelweiss Multi Strategy Fund Advisors, believes that Category-3 AIFs allow AMCs to use a wide range of strategies and innovations. “Category-3 AIFs offer the benefits of pooling money like a mutual fund and much of the investment flexibility that a PMS offers. Fund houses are launching Category-3 AIFs to take advantage of this dual benefit.”
Aditya Birla, DSP Blackrock, Edelweiss, ICICI Prudential, IIFL, IDFC, Motilal Oswal, Reliance, SBI and Sundaram are some of the key players in category-3 AIFs. They typically adopt a variety of strategies like long-short investments, concentrated portfolio, investing in likely IPOs to generate returns for investors.
Category-2 AIFs, however, require a specialised skillset. "Our product basket has been designed taking into account market cues and investor needs. With private debt expected to grow in coming years, we believe that a debt oriented category-2 AIF can be a good-long term value proposition for our clients," says Srinivas Jain, Executive Director & Chief Marketing Officer (Strategy and International Business), SBI Funds Management.
Axis, Edelweiss, HDFC, ICICI Prudential, IIFL, Indiabulls, Reliance, UTI are key players in the Category-2 AIF space.