Your AMC has shifted focus from mutual funds to AIFs. Why is that so?
AIFs give you more flexibility to decide fund strategies and fee structures. However, you cannot do much in mutual funds.
In addition, you need at least 5 to10 years to make your mutual funds business profitable. However, you can run a profitable business from day one in AIFs.
We are not saying that we will not focus on mutual funds. Of course, it is our long-term plan to build a sustainable mutual fund business in India. For this, we would leverage our AIF business to maintain stability in the profitability and cash flows. Once we grow our size and distribution network, we will start focus on mutual funds. Till then, we will continue to concentrate on our private equity and debt funds.
Which investor needs do AIFs satisfy that mutual funds cannot?
Mutual funds typically hold 50 stocks in a diversified scheme. However, investors can get access to a concentrated folio in AIFs.
In addition, all AIFs have skin in the game. Simply put, fund managers and sponsors invest in schemes, which they run for investors. I think it is a win-win for all. Though there is a concept of skin in the game in mutual funds also, it is concentrated in liquid investments.
Another benefit is here you can pursue a niche strategy. For instance, you can run a portfolio concentrating only on NBFCs, which mutual funds cannot provide. In addition, you can build a specific portfolio such as a fund, which follows say, banks and consumption themes simultaneously.
How do you go about constructing your portfolio? How do you protect the downside?
We follow a combination of both the approaches - top down and bottom up to construct a portfolio. We first decide which sector to look at and then pick stocks. We look at the companies having competitive advantage, track-record of paying handsome dividends and good management.
In addition, we do not go by benchmark. Simply put, we are benchmark agnostic. The percentage of our holdings dependson our comfort level..
We mitigate risks by maintaining quality portfolio. We never invest in high beta stocks. If you look at beta of our portfolio, it is less than 1. In addition, we invest in companies having clean balance sheets.
SEBI data shows that private equity funds have grown two-fold over the last one year. What has contributed to this growth?
Two factors have contributed to this growth – clarity in regulations and taxation and under-allocation in AIFs.
Over the years, SEBI has brought in great clarity in terms of lock in period and skin in the game. In addition, the budget has given pass through structure to AIFs.
Earlier, HNIs were not investing in private equity funds. These investors have now started putting their money in private equity to get better risk-adjusted returns and benefit from the flexibility in portfolio.
Most of your funds focussed on pre-IPPO and IPO phase companies. How do you identify such opportunities in market?
There are three ways to identify companies in their pre-IPPO and IPO phase.
The first way is to scout for such news through media reports. We keep on tracking developments in the IPO space.
We have a healthy relationship with investment bankers. They are the ones who are involved in issuance of IPOs. These banks help us identify companies in their pre-IPPO and IPO phase.
Another way to identify such companies is through our distribution network. We have good relationships with promoters of various companies. They keep us posted on their plans to raise capital.
Why should IFAs look at adding AIFs to their offerings? What kind of commissions can they expect from AIFs?
IFAs catering to HNIs should consider dealing with such products. A simple mutual fund may not work for HNIs. IFAs should try to enhance their knowledge on alternative investments and structured products to meet their expectations.
IFAs should increase their product basket by offering products related to art like paintings and sculptures and structured products like PMS, hedge funds, private equity and venture capital to deal with wealthy clients.
In terms of income, IFAs can get commission of 40-60% of management fee depending on the product, tenure and lock in.
There has been a concern among investors on the transparency of AIFs. How often do you disclose the portfolio to investors?
We send details of our top holdings, fact sheets and expense ratios on a monthly basis with a detailed attribution of performance. In addition, we do regular audit of our portfolios.
What is required to make AIFs more popular in India?
Currently, offshore investors are driving the private equity funds in India. With the increase in distribution channels such as IFAs, boutique firms and family offices, we will see an increase in participation from on shore investors too.
Another factor that would help increase popularity of AIFs in India is clarity in taxation norms of category III AIFs. Hedge funds fall under this category. However, there are funds such as long only funds, which use complex strategies of derivative markets to build a portfolio. These funds are long term in nature. In my view, SEBI should include long only funds under AIF category III. In addition, clarity in taxation norms could help the industry in a big way.
